THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


61ST  CONGRESS  :  :  2d  SESSION 

1909-1910 


ENATE  DOCUMENTS 


Vol.  41 


WASHINGTON  :  :  GOVERNMENT  PRINTING  OFFICE  :  :  1911 


«j    «L  ^ 


61ST  Congress  /  SENATE  -^  Documknt 

2d  Sessio7i       \  )  591 


NATIONAL   MONETARY  COMMISSION 


HISTORY  OF  THE  BANK 
OF  ENGLAND 

And  its  Financial  Services  to  the  State 

Second  edition,  revised 


EUGEN  VON  PHILIPPOVICH 

'Professor  of  Political  Economy  in  the  University  of  I'ienna 

Translated  by 

CHRISTABEL   MEREDITH 

WITH  AN  INTRODUCTION  BY 
H.  S.  FOXWELL 


Washington  :  Government  Printing  Office  :  1911 


NATIONAL  MONETARY  COMMISSION. 


Nki,son  W.   Aldrich,   Rhode  Island,  Chairman. 
Edward  B.  Vreeland,  New  York,  Vice-Chairman. 


Julius  C.  Burrows,  Michigan. 
Eugene  Hale,  Maine. 
Philander  C.  Knox,  Pennsylvania. 
Theodore  E.  Burton,  Ohio. 
Henry  M.  Teller,  Colorado. 
Hernando  D.  Money,  Mississippi. 
Joseph  W.  Bailey,  Texas. 


John  W.  Weeks,  Massachusetts. 
Robert  "W.  Bonyngb,  Colorado. 
Sylvester  C.  Smith,  California. 
Lemuel  P.  Padgett,  Tennessee. 
George  F.  Burgess,  Texas. 
Ars£:ne  P.  Pujo,  Louisiana. 
Arthur  B.  Shelton.  Secretary. 


A.  Piatt  At^viRSW,  Special  Assistant  to  Commission. 


-p  r=^  ^  -^L^ 


TABLE  OF  CONTENTS 


Page. 

Introduction  by  H.  S.  Foxwell 5 

Preface  to  first  edition 23 

Preface  to  second  edition 27 

Introduction 29 


PART  I. 

The  Foundation  of  the  Bank  of  England. 

I.  The  development  op  English  economic  organization  dur- 
ing THE  SEVENTEENTH  CENTLTRY,  WITH  SPECIAL  REFERENCE 
TO  THE  LOAN  SYSTEM 43 

II.  Public  credit  before  the  foundation  of  the  bank 55 

III.  The  foundation  of  the  Bank  op  England,  and  its  statu- 
tory RELATION  TO   THE   STATE 68 


PART  n. 


The  Relations  between  the  Bank  and  the  AD^^NISTRATION  of 
THE  Public  Debt,  and  op  the  Public  Money  during  the  Eight- 
eenth Century 78 

The  evolution  of  the  national  debt  and  of  its  administration. 

A.  The  principle  of  the  incorporation  of  public  debt  as  recognized 

at  the  foundation  of  the  bank,  and  its  subsequent  application: 

1.  The  principle  of  incorporation 80 

2.  The  attempt  to  establish  a  land  bank 84 

3.  The  East  India  Co 86 

4.  The  South  Sea  Co 91 

B.  History  of  the  exchequer  bills  and  their  importance  in  the  sys- 

tem of  public  debt 96 

C.  The  administration  of  the  national  debt  by  the  companies: 

1.  The  distinct  characters  of  the  companies iii 

2.  The  development  of  the  forms  of  debt 113 

3.  The  connection  between  the  companies  and  the  manage- 

ment of  the  public  debt 123 

(a)  The   East  India  Co 125 

(b)  The  South  Sea  Co 125 

(c)  The  Bank  of  England 132 

4.  The  duties  involved  in  the  management  of  the  debt  and 

the  indemnity  paid  by  the  State 137 

II.  The  administration  of  public  money  and  the  bank's  share 

therein 143 

I.  The  central  financial  authorities — the  treasury  and  the 

exchequer 145 


National      Monetary      Commission 


II.  The  administration  op  public  money  and  the  bank's  share 

THEREIN — Continued.  Page. 

2.  The  position  of  the  receipt  offices  and  the  exchequer 152 

3.  The  right  of  assignment 160 

4.  The  administration  of  money  by  the  pay  departments.  .  164 

5.  The  transactions  between  the  public  ofhce  and  the  bank .  175 


PART  m. 

The  Legal  Development  of  the  Relations  between  the  Bank 

AND    the    AdMINISTR.^TION    OF    THE     PUBLlC     DEBT    AND     PUBLIC 

Money. 
I.  The  bank  and  the  administr-^tion  of  the  public  mo.vey. 

1.  The  reforms  in  the  administration  of  public  money  be- 

tween 1780  and  1834 183 

2.  The  union  of  the  public  treasury  with  the  bank  (1834). .       190 

3.  Reforms  in  organization  and  administration  between  1834 

and  1866 197 

II.  The  bank  and  the  organization  of  the  public  debt 210 

PART  IV. 

The  Present  Position  of  the  Bank  as  the  Financl\l  Servant 

OF  THE  State 220 

I.  The  bank  as  manager  of  the  public  mo.vey. 

1.  The  concentration  of  the  public  revenue  in  the  bank 222 

2.  The  exchequer  account 225 

3.  The  paymaster  general  and  his  accounts 231 

4.  Provisions  for  covering  the  cash  deficit 242 

5.  Methods  of  payment 244 

6.  The  control  over  money  transfers 249 

II.  The  ba.nk  as  the  office  for  the  management  of  the  public 

debt 253 

Conclusion 261 

Appendix  I 

The  statutory  b.\sis  of  the  position  of  the  Bank  of  Engla.nd 
IN  THE  English  economic  system 271 

Appendix  II 

The  settlement  of  the  nation.\l  land  bank 281 

Appendix  III 

The  present  forms  of  the  exchequer  bills,  treasury  bills, 
and  exchequer  bonds 285 

Appendix  IV 

Average  amount   of   the   public   deposits   at   the   Bank  of 
England 288 

Appendix  V 
Bank  act,  1892 290 


INTRODUCTION 


H.    S.   FOXWELL. 


The  work  of  Professor  Philippovich  here  translated  is  a 
recognized  economic  classic.  It  owes  this  position  to  the 
importance  of  its  subject  and  the  thoroughness  and  accuracy 
with  which  the  distinguished  author  has  handled  it.  The 
position  of  the  Bank  of  England  is  so  exceptional  that  its 
history  must  always  be  of  peculiar  interest ;  and  this  more 
especially  in  so  far  as  concerns  its  relations  to  public  finance. 
For  this  Bank  was,  above  all  others,  perhaps,  in  its  origin 
and  development,  emphatically  the  servant  of  the  State. 
Arising  out  of  a  State  loan,  it  was  cradled  in  a  Ways  and 
Means  Act  dealing  with  the  tonnage  duties  imposed  to 
provide  interest  on  the  loan;  and  in  early  days  was  nick- 
named the  "  Tunnage  Bank." 

At  the  outset  the  Bank  of  England  had  no  other  statutory 
relations  to  the  State;  in  fact,  special  provision  was  made 
to  limit  its  services  to  those  authorized  by  Parliament. 
Even  its  banking  monopoly  was  not  conferred  by  the  orig- 
inal charter.  Starting  without  a  monopoly,  it  obtained 
its  privileged  position  by  its  unfailing  loyalty  to  the  Gov- 
ernment; just  as  the  Bank  of  Scotland,  which  started 
with  a  monopoly,  lost  it  in  1727  by  its  suspected  affection 
for  the  interest  of  the  Pretender.  Thus  the  different 
attitude  toward  the  State  of  the  two  contemporary  banks, 
carrying  with  it  differences  of  privilege,  determined  the 
difference  in  the  national  systems  of  banking  in  England 


National     Monetary     Commission 

and  Scotland,  a  difference  which  reached  its  extreme 
about  a  century  ago.  The  nineteenth  century  has  seen 
the  struggle  between  these  two  types  of  banking  end  in 
the  complete  victory  of  the  Scottish  type.  The  issue  is 
still  a  live  one  in  the  United  States;  but  in  the  United 
Kingdom  it  may  now  be  said  that,  for  good  or  ill,  the  large 
branch  bank  has  completely  ousted  the  small  local  bank. 
In  all  probability  this  result  would  have  come  about  at 
least  a  century  earlier  but  for  the  close  connection  between 
the  Bank  of  England  and  the  State. 

But  though  the  Bank  of  England  was  at  its  origin  rather 
an  incident  of  State  finance  than  the  foundation  of  a 
national  banking  system,  its  services  to  the  State  were 
very  narrowly  restricted  by  statute.  It  is  curious  to  note 
that  those  exchequer  functions  which  it  afterwards  under- 
took, and  whose  gradual  assumption  it  is  the  principal 
object  of  this  book  to  trace,  are  not  even  referred  to  in 
the  original  act  and  charter.  The  fact  is  that  the  Bank 
of  England,  like  most  really  English  institutions,  was  case- 
made;  it  owed  its  form  and  functions  not  to  systematic 
planning,  but  to  attempts  to  meet  emergencies  as  they 
from  time  to  time  arose.  Thus  the  "running  cash  note," 
which  aftenvards  became  the  most  effective  banking  instru- 
ment of  the  English  bank,  was  an  evasion,  even  if  not 
(as  often  alleged)  a  positive  infraction  of  its  charter. 
The  charter  only  contemplated  an  issue  of  "sealed  bills," 
strictly  limited  in  amount  to  the  capital  subscribed.  If 
this  was  so  with  its  banking  methods,  it  was  equally  the 
case  with  its  relations  to  the  Exchequer. 

The  connection  of  the  Bank  wuth  the  public  revenue,  as 
Professor  Philippovich  clearly  shows,  grew  up  informally 


The     English     Banking     System 

long  before  it  received  legislative  recognition.  It  can  not 
be  said,  however,  that  the  matter  was  altogether  over- 
looked at  the  foundation  of  the  Bank.  As  usually  happens 
in  times  of  national  crisis,  when  the  public  mind  is  deeply- 
stirred,  the  air  was  full  of  constructive  schemes,  and 
almost  every  conceivable  form  of  public  bank  had  active 
and  able  advocates.  "Banks  swarm  everywhere,"  writes 
L'Hermitage,  referring  to  the  numerous  projects  in  1695. 
Among  the  various  types  then  proposed  there  are  of  special 
interest:  The  State  Bank,  owned  by  the  State;  the  National 
Branch  bank  of  the  type  of  the  present  Banque  de  France; 
and  the  Bank  of  London,  or  City  Bank,  under  the  man- 
agement of  the  Corporation.  The  first  and  last  of  these 
were  at  the  time  inadmissible.  The  credit  of  neither  State 
nor  City  of  London  would  have  commanded  general  con- 
fidence. It  is  to  be  observed  that  contemporary  writers 
always  spoke  of  the  Bank  of  England  as  resting  upon  Par- 
liamentary, not  State,  security;  that  is,  upon  an  income 
definitely  secured  by  the  Parliament  upon  the  yield  of  par- 
ticular taxes.  The  Crown  might  have  had  more  to  say  in 
regard  to  a  State  bank.  Moreover,  the  authorities  of  a 
State  bank  might  have  sacrificed  both  the  national  trade 
and  the  stability  of  the  Bank  to  exigencies  of  State.  A 
board  of  merchants  representing  private  proprietors  was 
less  likely  to  make  this  mistake.  No  doubt  a  city  bank, 
resting  like  those  of  Amsterdam  and  Hamburg  on  the 
guaranty  of  the  Corporation,  might  have  been  trusted  to 
promote  commercial  interests.  But  the  credit  of  the  City 
of  London  in  1694  was  at  its  lowest  ebb.  The  Chamber 
of  London,  classed  in  1650  with  the  Bank  of  Amsterdam  as 


National     Monetary     Commission 

an  example  of  the  highest  kind  of  security,  had  recently 
"fail'd  to  the  Ruine  of  many  thousands  of  all  Ages  and 
Ranks."  They  had  been  obliged  to  apply  to  Parliament 
in  1693  for  "means  of  satisfying  the  Debts  due  to  the 
Orphans  by  their  Orphans  Fund,"  which  was  then  some 
£600,000  in  default.  A  bill  was  prepared  to  provide  cer- 
tain local  dues  for  this  purpose,  and  passed  into  law  June, 
1694.  The  extremity  to  which  the  city  was  reduced  may 
be  judged  from  the  fact  that  they  paid  Speaker  Trevor 
a  bribe  of  i  ,000  guineas  to  secure  the  passing  of  this  bill, 
no  less  a  man  than  Sir  John  Houblon,  afterwards  first 
governor  of  the  Bank  of  England,  being  a  witness  to  the 
transaction.  The  bribe  was  discovered  later,  and  the 
Speaker  expelled  from  the  House.  The  whole  business 
left  the  Corporation  gravely  discredited.'* 

It  is  not  so  clear  why  the  third  type  of  bank  did  not 
receive  more  consideration.  This,  whether  under  State  or 
private  management,  was  to  be  a  National,  rather  than 
a  London  bank,  and  to  have  branches  in  every  important 
town.  It  was  argued  in  favor  of  this  plan  that  it  would 
give  a  much  more  general  stimulus  to  industry  and  trade; 
that  it  would  tend  to  prevent  their  undue  concentration 
in  the  Metropolis  (Bristol  was  greatly  concerned  on  this 
point) ;  and  that  it  would  furnish  invaluable  facilities  for 
remittance,  practically  doing  away  with  internal  exchange 
rates,  then  very  burdensome.  Numerous  proposals  had 
been  made  for  a  bank  of  this  type,  most  of  them  anonv- 
mous.     Those  by  Daniel  Beeckman,  by  John  Cary  of  Bris- 

«1 "  The  poor  Orphans  sufferings  are  still  fresh  in  Memory, "  says  the  author 
of  A  nglicB  Tutamen,  in  1695. 


The     English     Banking     System 

tol,  the  friend  of  Locke,  and  by  Daniel  De  Foe  were 
distinctly  able  and  well  worked  out.  Most  of  the  pro- 
jectors laid  stress  upon  the  great  services  such  a  national 
bank  might  render  to  the  Exchequer,  in  the  collection 
of  the  revenue,  and  by  preventing  the  loss  sustained  by 
the  State  through  idle  balances.  Cary  was  more  con- 
cerned for  the  effect  on  trade.  "Banks,  as  I  humbly 
conceive,"  he  writes,  "ought  chiefly  to  be  calculated  for 
the  use  of  Trade,  and  modeled  so  as  may  best  content  the 
Traders." 

But  it  was  otherwise  decided.  At  this  time  the  purely 
financial  interest  dominated.  The  trading  and  country 
interest  was  to  a  large  extent  sacrificed,  and  administra- 
tive facilities  were  not  considered.  It  was  nearly  150 
years  before  the  country  had  an  adequate  system  of 
banks,  such  as  might  have  been  founded  in  1694,  if  one 
or  other  of  these  proposals  for  national  banks  had  been 
accepted.  The  administrative  economies  possible  in  the 
system  of  public  receipts  and  payments  were  postponed 
to  the  more  urgent  problem  of  obtaining  money  to  pay. 
As  our  author  shows,  the  engrafting  of  Exchequer  business 
on  the  Bank  grew  up  gradually,  almost  by  accident; 
possibilities  of  this  sort  were  not  taken  into  account  in 
deciding  on  the  form  to  be  given  to  the  Bank. 

It  must  be  admitted  that  the  State  did  pretty  well 
for  itself.  It  derived  substantial  advantage  from  the 
Bank,  not  only  in  the  great  emergencies  of  William's 
reign,  but  from  time  to  time  afterwards,  and  notably  on 
the  occasion  of  Charter  renewals;  this  too,  without 
depriving   the    Bank   of   its    private    character,    and    its 


National    Monetary     Commission 

responsibility  for  losses.  This,  again,  is  characteristic 
of  English  methods.  The  State  prefers  to  exploit  pri- 
vate enterprise,  rather  than  to  engage  in  enterprise 
itself.  "Heads  I  win,  tails  you  lose,"  is  its  attitude 
toward  private  business.  Considering  how  small  is 
the  chance  that  the  State  will  ever  make  any  profit  on 
its  own  account,  the  attitude  is  not  unwise. 

The  question  of  Exchequer  methods,  however,  deserved 
attention;  and  its  importance  had  already  been  realized 
by  the  English  people.  Whenever  a  great  central  bank 
acts  as  an  Exchequer,  even  if  its  range  is  only  metro- 
politan, there  must  be  a  great  economy  in  the  use  of 
money.  This  was  carefully  pointed  out  by  many  writers 
of  the  time.  They  could  remember  the  gross  abuses  of 
the  time  of  Charles  II,  when  the  receivers  lent  balances 
to  the  goldsmiths  long  overdue  to  creditors  of  the  State, 
while  the  unhappy  creditors  were  forced  to  go  to  these  very 
goldsmiths  to  borrow  back  their  own  money  at  usurious 
rates.  Down  to  a  much  later  period,  large  fortunes 
were  made  by  revenue  officials  at  the  expense  of  the 
State.  Occasionally  we  come  across  complaints  which 
have  a  more  modern  ring.  The  large  balances  in  the 
hands  of  receivers  of  the  revenue  are  alleged  to  have 
caused  a  scarcity  of  money  in  the  market.  But  as  a 
rule  the  receivers  banked  or  lent  their  money;  it  was 
their  obvious  interest  to  do  so.  The  money  was  there- 
fore not  taken  off  the  market,  as  is  the  case  when  public 
moneys  are  held  by  an  independent,  non-banking,  treas- 
ury. Still,  if  there  had  been  time  for  fuller  consideration, 
the  question  of  the  relation  of  the  Bank  to  the  Treasury 
might   well    have    received    more    thought.     The    Bank 


The     English     Banking     System 

was  not  only  willing,  but  anxious,  to  undertake  Treas- 
ury business.*^  If  their  suggestions  had  been  acceptable 
to  Parliament,  great  advantages  of  economy  and  accounta- 
bility might  have  been  secured  from  the  very  foundation 
of  the  Bank,  which,  as  a  matter  of  fact,  were  only  com- 
pletely realized  by  an  evolution  extending  over  more 
than  a  century  and  a  half. 

In  1806,  when  the  constitution  of  the  Bank  of  France 
was  under  discussion,  this  evolution  was  so  far  complete 
that  the  greater  proportion  of  revenue  payments  were 
made  through  the  Bank  of  England.  It  is  interesting, 
therefore,  to  consider  the  grounds  on  which  Napoleon, 
with  the  English  experience  before  him,  concluded  that 
the  French  Bank  should  not  undertake  Treasury  business. 
There  is  a  graphic  account  of  the  discussions  on  this 
question  between  Mollien  and  the  Emperor  in  Mollien's 
Memoires  (especially  Vol.  I,  pp.  292-315,  and  Vol.  II, 
pp.  50,  etc.).  It  is  pretty  clear  that  the  Emperor  allowed 
himself  to  be  persuaded  by  Mollien  against  his  own  con- 
victions. The  Emperor  wished  to  see  the  Bank  of  France 
undertaking  the  custody  and  remittance  of  the  revenues, 
and  provided  with  branch  offices  throughout  the  country. 
Mollien's  attitude  was  critical  and  ultra-cautious.  He 
seems  to  have  feared  that  the  Emperor  would  have  made 
the  Bank  a  mere  engine  of  State  finance.  Previous  banks 
of  France  had  been  wrecked  by  the  demands  of  the  State, 

oSee  An  Essay  upon  the  National  Credit  of  England,  iyo6:  "It  has  been 
said  that  they  would  give  a  Million  of  Money  for  this  Privilege,  which  has 
never  yet  been  granted,  but  expressly  prohibited  by  the  Parliament, 
(excepting  for  a  small  time  and  in  an  extraordinar>-  case),  though  some 
think  there  are  means  found  out,  in  a  great  measure,  to  evade  that  pro- 
hibition" (p.   11).     The  surmise  was  not  far  wrong. 


National     Monetary     Commissiofi 

and  the  Bank  of  England  itself  had  only  narrowly  escaped 
disaster  from  the  same  cause  more  than  once  in  its  career. 
Logically,  of  course,  there  was  no  necessary  connection 
between  an  Exchequer  agency  and  advances  to  the  State ; 
but  it  would  be  hard  to  say  that  in  practice  the  former 
might  not  be  made  a  pretext  for  insisting  upon  the  latter. 
Mollien's  account  of  the  conflict  of  opinion  thus  arising 
is  of  almost  dramatic  interest.  He  says  that  the  Emperor 
had  often  conversed  with  him  about  the  Bank  he  had 
just  established  "sous  le  litre  pompeux  de  Banque  de 
France.''  The  Emperor  had  the  highest  expectations  of 
this  Bank.  Mollien  was  as  cold  on  the  subject  as  the 
most  severe  doctrinaire  of  the  "Guillaumin  school"  could 
be.  The  Emperor  asks  him  if  he  still  maintains  his  spite 
against  the  Bank.  Mollien  replies  by  tendering  him  a 
carefully  prepared  paper  setting  forth  his  views.  Much 
of  this  deals  with  points  in  the  charter,  to  which  he  raises 
sound  objections.  The  French  Bank  ought  to  have  paid 
for  its  monopoly,  as  the  English  Bank  did.  Instead, 
Government  was  a  shareholder  in  it.  If  at  the  start  the 
Government  did  the  Bank  some  service  in  subscribing 
these  5,000  shares,  it  would  now  be  doing  it  a  greater 
service  if  it  would  free  it  from  the  tutelage  of  such  a 
shareholder,  who,  sooner  or  later,  might  become  suspect. 
It  was  because  the  English  Government  was  scrupulously 
careful  to  fulfill  all  the  obligations  with  which  private 
debtors  had  to  comply  that  it  was  able,  without  endan- 
gering the  Bank,  to  obtain  assistance  from  it.  The 
English  Bank  made  payments  and  discoimts  for  the 
Government  just  as  for  private  firms  who  had  opened 
accounts  with  it.     The  English  Bank  also  collected  cer- 


The     English     Banking     System 

tain  portions  of  the  public  revenue,  and  especially  those 
pledged  for  the  service  of  the  debt;  but  it  was  rather  as 
"Grand  syndic  des  creanciers  de  I'Etat"  than  as  Govern- 
ment agent  that  it  made  these  collections.  The  State  no 
longer  had  the  disposal  of  these  revenues,  because  they 
had  been  made  over  to  its  creditors;  and  it  was  to  em- 
phasize the  unqualified  character  of  this  assignment  that 
the  duty  of  collecting  directly  from  the  public  receivers 
the  corresponding  amounts  was  imposed  on  the  Bank. 
Moreover,  owing  to  the  fact  that  the  bulk  of  the  English 
debt  was  in  the  hands  of  large  holders,  who  kept  accounts 
with  the  Bank,  the  payment  of  interest  was  a  very  simple 
matter.  It  would  be  otherwise  in  France,  where  the 
average  holding  in  1806  was  only  450  francs. 

MoUien  goes  on  to  urge  that  the  new  French  Bank 
can  not  be  usefully  compared  with  the  English  Bank, 
resting  as  the  latter  did  upon  a  century  of  success.  Eng- 
land, he  says,  is  perhaps  the  only  country  where  the  cre- 
ations of  credit  enjoy  so  wide  a  currency  that  artificial 
money  itself  does  not  degenerate  into  paper  money.  He 
thought  that  the  real  guarantee  of  the  English  paper 
was  neither  the  shareholder's  capital  nor  the  securities 
held  by  the  Bank,  but  the  immense  mass  of  goods  stored 
in  the  country.  Napoleon  here  interposes  his  own  expla- 
nation. He  sums  up  the  matter  in  an  admirable  phrase, 
worthy  of  his  genius,  which  exactly  hits  the  mark:  "  Peo- 
ple have  sense  enough  to  understand  that  bank  notes  are 
not  paper  money. ' '  These  half  dozen  words  exactly  express 
the  position  maintained  four  years  later  by  the  Bank  of 
England  against  the  Bullion  Committee,  and  form  the 
best  answer  to  the  innumerable  schemes  for  Government 


13 


National     Monetary     Commission 

Banks  of  Issue  so  constantly  put  forward.  Government 
paper  is  forced  out  in  payment  of  the  limitless  expenses 
of  the  State.  Bank  paper,  whether  bank  notes,  as  in 
those  days,  or  checks  to-day,  is  issued  against,  and  more  or 
less  limited  by,  sound  and  well-secured  commercial 
credit.  Bank  paper  is  normally  convertible;  State  paper 
always  tends  toward  inconvertibility.  It  was  a  sound 
instinct  that  led  England  in  1694  and  France  in  1800  to 
make  their  public  banks  commercial  companies  instead  of 
departments  of  State. 

To  return  to  the  question  with  which  we  are  here 
mainly  concerned,  it  would  appear  that  the  Bank  of 
France  in  1806,  like  the  English  Bank  a  century  before, 
was  not  unwilling,  while  retaining  its  independence,  to 
undertake  a  large  part  of  the  Treasury  business.  It  is 
not  quite  certain  how  far  the  governor,  Cr^tet,  repre- 
sents the  views  of  the  proprietors,  because  in  1806,  for 
the  first  time,  the  governor  of  the  Bank  was  appointed 
by  the  Emperor,  and  Cretet  therefore  presided  as  Napo- 
leon's nominee.  But  in  the  discourse  which  Cretet 
made  to  the  general  assembly  of  the  Bank  Direction  on 
the  13th  of  May,  1806,  we  find  him  a  pronounced  advo- 
cate of  closer  relations  with  the  Treasury.  He  expresses 
the  hope  that  the  Treasury  may  be  willing  to  concentrate 
in  the  hands  of  the  Bank  revenue  services  now  distributed 
amongst  so  many  intermediaries,  estimating  the  econo- 
mies which  would  result  from  such  a  centralization  at 
from  3,000,000  to  5,000,000  francs  per  annum.  He  even 
congratulates  the  Bank  on  having  secured  a  State  lottery 
agency,  promising  little  profit,  because  it  may  lead  to 
more  important  connections.     This,  of  course,  was  pre- 


14 


The     English     Banking     System 

cisely  what  Mollien  feared.  So  anxious  was  he  to  pre- 
vent any  advance  in  this  direction  that,  against  the 
advice  of  the  responsible  minister,  Marbois,  we  find  him 
supporting  a  proposal  for  constituting  the  receivers- 
general  into  a  bank  of  their  own.  This  bank  was  to 
handle  the  public  moneys  and  to  make  advances  to  the 
Emperor  on  the  revenue.  The  proposal  seems  to  have 
been  adopted.  The  circulation  of  short  Treasury  paper, 
says  Mollien  later,  is  intrusted  to  the  receivers-general. 
For  the  time,  therefore,  Mollien  had  his  way. 

It  is  doubtful  whether  Napoleon  was  really  convinced 
by  Mollien's  arguments,  but  he  had  a  high  esteem  for  him 
and  may  have  thought  that  there  were  grounds  for  caution. 
After  listening  to  Mollien,  he  sat  silent  for  a  few  minutes 
and  then  observed:  "The  world  is  old;  we  should  profit 
by  its  experience.  It  teaches  us  that  ancient  practice  is 
often  worth  more  than  new  theories."  In  one  way  or 
another,  Napoleon  is  brought  to  say,  in  the  end,  that  "the 
one  thing  that  seemed  clear  to  him  was  that  there  must 
be  no  alliance  between  the  business  of  the  Treasury  and 
that  of  the  Bank."  But  if  he  thus  adopts  Mollien's  policy, 
it  must  of  course  be  for  reasons  of  his  own.  "Amongst 
many  good  reasons,  one  had  decided  him,"  he  tells  Mollien. 
"A  simple  movement  of  public  moneys  often  carried  with 
it  a  State  secret.  He  did  not  wish  to  increase  the  number 
of  his  confidants  in  matters  of  this  kind.''  This  is  a 
reason  that  would  appeal  to  Napoleon;  needless  to  say,  it 
was  not  influential  with  Mollien;  so  far  as  one  can  trace, 
he  does  not  even  mention  it.  Mollien  was  really  afraid 
that  relations  with  the  Treasury  would  compromise  the 
stability  of  the  Bank.     This  had  often  been  the  case  in  the 


15 


National    Monetary     Commission 

past;  no  one  was  in  a  better  position  than  Mollien  to 
judge  of  the  probabihty  that  history  might  repeat  itself 
in  the  France  of  his  day.  Yet  Napoleon's  ideas  were  in 
the  abstract  sound  enough,  and  the  later  history  of  the 
Bank  of  France  has  justified  him.  The  Bank  now  has, 
as  he  desired,  branches  in  every  department,  in  fact  in 
every  important  town;  and  the  Treasury  makes  large 
use  of  its  admirable  organization  for  the  service  of  the 
revenue.  The  Bank  of  France,  in  fact,  keeps  the  Gov- 
ernment account. 

The  classical  case  of  the  Second  Bank  of  the  United 
States,  where  a  public  bank,  actually  discharging  these 
exchequer  functions,  was  in  1834  deprived  of  them,  pre- 
sents a  still  stronger  contrast  to  the  history  of  the  Bank 
of  England.  It  need  not  be  more  than  mentioned  here,  as 
the  circumstances  are  so  familiar,  and  have  been  so  ex- 
haustively chronicled.  It  is  possible  to  insist  too  much 
on  these  international  parallels  and  contrasts.  No  two 
countries  can  be  strictly  compared  in  a  matter  of  this  com- 
plex character;  each  case  must  be  carefully  considered 
with  reference  to  all  the  pertinent  political  and  economic 
conditions.  Perhaps  the  analogy  is  closer  between  the 
English  and  French  banks ;  but  even  here  it  would  not  do 
to  attempt  to  draw  general  conclusions  from  the  divergent 
policies  adopted.  The  chief  use  and  justification  of  such 
comparisons  is  their  tendency  to  stimulate  further  inquiry. 

As  far  as  the  Bank  of  England  is  concerned,  there  is 
little  to  be  added  to  the  very  complete  account  of  the  his- 
tory of  its  relations  to  the  State  given  by  Professor  Philip- 
povich.  That  account  is  brought  down  to  the  year  1885. 
The  only  changes  requiring  note  since  that  date  are  those 


z6 


The     English     Banking     System 

effected  by  the  55  &  56  Victoria,  C.  48,  usually  known  as 
the  Bank  Act  of  1892.  This  act  is  printed  in  an  Appendix 
to  this  volume.  It  made  a  new  adjustment  of  the  pay- 
ments due  to  the  Banks  of  England  and  Ireland  for  the 
management  of  the  debt,  in  which  was  now  included  the 
local  loans  stock  (municipal)  and  the  guaranteed  land 
stock  (Ireland) .  It  was  a  natural  time  for  a  reconsidera- 
tion of  the  question.  The  great  conversion  of  the  national 
debt  had  been  successfully  carried  through  by  Mr.  (after- 
wards Viscount)  Goschen  in  1888  and  1889.  Both  banks 
had  given  invaluable  assistance  in  the  operations.  Sir 
E.  W.  Hamilton,  in  the  official  account  of  the  conversion, 
writes  that  "the  labour  which  the  attainment  of  such 
results  imposed  on  the  Banks  of  England  and  Ireland  was, 
as  can  readily  be  imagined,  prodigious;  and  nothing  short 
of  perfect  organization  and  untiring  zeal  could  have  en- 
abled those  establishments  to  grapple  with  it."  To  give 
some  idea  of  the  magnitude  of  the  necessary  operations, 
he  mentions  a  number  of  interesting  particulars.  From 
these  we  learn  that  the  total  number  of  accounts  of  holdings 
inscribed  in  the  books  of  the  Bank  of  England  was  169,235, 
"  which  varied  in  amount  from  £5,760,000  to  the  curiously 
small  sum  of  i  penny."  Three  hundred  and  eighty-seven 
millions  odd  of  Consols  and  Reduced  Threes  were  converted 
by  the  Bank  of  England.  The  Bank  staff  had  to  be  largely 
increased,  and  during  some  weeks  100  men  worked  until 
II  p.  m.,  and  50  throughout  the  night.  Difficulties  of 
identification  and  verification  of  agency  were  specially 
great.  "  In  spite  of  the  immensity  and  the  intricacy  of 
the  work,  no  mistakes  were  committed ;  no  delays  occurred ; 
scarcely  a  complaint  against  the  banks  was  preferred." 

68299° — II 2  17 


National     Monetary     Commission 

The  remuneration  received  by  the  two  banks  was 
£101,541  15s.  I  id. — £98,248  2d.  to  the  Bank  of  England, 
£3,293  15s.  9d.  to  the  Bank  of  Ireland;  a  small  part  of  the 
total  expenses  of  the  conversion,  estimated  at  £1,294,142 
1 6s.  yd.  This  expense,  together  with  the  cost  of  an  addi- 
tional quarterly  dividend,  due  to  the  change  from  half 
yearly  to  quarterly  payment,  was  almost  wholly  defrayed 
out  of  the  surplus  revenue  for  the  year  1888-89.  I'he 
work  in  connection  with  the  redemption  of  unconverted 
stock  was  much  heavier,  in  proportion  to  the  amount 
handled,  than  the  work  of  conversion  itself.  For  this  the 
Bank  of  England  received  £14, on  iis.  iid.  and  the  Bank 
of  Ireland  £500.  Thus  the  Bank  of  England  received 
about  £112,260  for  its  services  in  the  double  operation. 
The  payment  was  undoubtedly  well  earned. 

The  national  debt  had  thus  changed  its  form,  and  the 
dividend  upon  the  whole  of  it  was  now  paid  quarterly 
instead  of  at  alternate  half-yearly  periods  on  the  two  por- 
tions, as  before.  Moreover,  the  dividend  upon  the  debts 
of  the  State  to  each  Bank  (£11,015,100  and  £2,630,769 
4s.  8d.,  respectively)  was  also  in  future  to  be  subject  to  the 
terms  of  the  Conversion  Act.  These  changes  made  it  fit- 
ting to  reconsider  the  pecuniary  arrangements  between  the 
Government  and  the  Bank  for  the  service  of  the  debt. 
These  arrangements  had  been  revised  by  Mr.  Gladstone 
in  1 86 1,  when  the  payments  to  be  made  by  the  State  were 
reduced  by  some  £50,000  a  year.  The  terms  of  the  exist- 
ing arrangement  will  be  foimd  in  the  printed  act  of  1892. 
They  are  not  subject  to  revision  until  March,  191 2.  They 
involve  a  further  saving  to  the  State  of  £45,700  a  year. 


18 


The     English     Banking     Syste 


m 


Reference  will  be  noticed  in  the  act  of  1892  to  a  possible 
supplementary  charter.  This  charter  was  applied  for  in 
due  course,  and  bears  date  August  19,  1896,  It  deals 
exclusively  with  what  may  be  called  the  internal  affairs  of 
the  Bank;  and  for  this  reason,  perhaps,  does  not  appear 
to  have  been  published.  It  seems  to  have  been  granted  in 
reply  to  a  petition  from  the  Bank,  stating  that  much  in- 
convenience was  caused  in  various  respects  by  certain  pro- 
visions of  the  old  charter.  The  new  provisions  substituted 
give  the  Bank  greater  freedom  in  matters  relating  to  its 
internal  government.  The  only  one  which  seems  to 
concern  the  public  is  the  first,  dealing  with  the  re-election 
of  directors.  By  the  first  of  the  acts  which  conferred  the 
bank  monopoly,  the  8  &  9  Wm.  Ill,  c.  20  (1697),  it  was 
enacted  (sec.  52)  "that  in  all  future  elections  of  directors, 
there  shall  not  be  chosen  above  two-thirds  of  those  who 
were  directors  the  preceding  year."  This  provision  does 
not  seem  to  give  adequate  guaranty  of  due  experience  or 
continuity  of  policy  in  the  bank  direction.  The  Bank 
petitioned  against  the  clause  March  26,  1697,  but  it  was 
adopted  by  the  House  in  spite  of  their  protest.  There  was 
at  that  time  a  widespread  fear  lest  the  power  which  their 
position  gave  to  the  directors  might  result  in  favoritism 
or  trade  monopoly,  and  this  may  have  influenced  the 
decision  of  the  House.  No  further  statutory  change 
appears  to  have  been  made  until  the  passing  of  the  act 
(j5  ^  3^  Vict.yC.  34\  July  18,  i8'j2)  An  act  to  amend  the  law 
relating  to  the  election  of  directors  of  the  Bank  of  England. 
This  provides  that  "  section  52  of  the  act,  8  &  9,  Wm.  Ill,  c. 
20  (which  section  relates  to  elections  of  directors  of  the 


'9 


National    Monetary     Commission 

Bank  of  England)  shall  have  efifect  as  if  seven-eighths  had 
been  therein  mentioned  instead  of  two-thirds."  By  the 
Bank  Act  of  1892  it  was  provided  that  the  act  of  1872 
(with  other  acts  scheduled)  should  be  repealed  as  from 
the  date  of  the  supplemental  charter,  if  granted  and 
accepted.  Accordingly  the  rule  now  in  force  is  that  laid 
down  in  the  first  clause  of  the  supplemental  charter.  It 
reads,  "  If  a  byelaw  made  by  a  General  Court  of  the  Bank 
of  England  so  provides,  such  proportion  as  is  fixed  by 
that  byelaw  of  the  existing  directors  of  the  Bank  of 
England  shall  not  be  eligible  for  re-election  at  the  then  next 
annual  election  of  directors."  What  the  actual  effect  of 
this  curiously  worded  clause  will  be  it  would  be  idle  to 
speculate;  it  seems  to  leave  the  matter  wholly  at  the  dis- 
cretion of  the  Bank  court.  The  question  has  only  an 
indirect  relation  to  the  main  subject  of  this  work;  but  as 
the  charter  is  mentioned  in  the  act  of  1892,  it  was 
thought  that  these  brief  explanations  might  be  of  interest. 

H.  S.  FoxwELL. 
January  9,  191 1. 


20 


THE  BANK  OF  ENGLAND  AND  ITS  FINANCIAL 
SERVICES  TO  THE  STATE 


BY 


EUGEN  VON  PHILIPPOVICH 


PREFACE  TO  THE  FIRST  EDITION. 

A  work  which  undertook  to  provide  a  complete  and 
systematic  description  of  the  history  of  the  Bank  of  Eng- 
land and  its  place  in  the  economic  life  of  the  English 
nation  would  certainly  deserve  a  most  favorable  reception. 
We  should  derive  from  it  a  deep  insight  into  English  eco- 
nomic history,  and  should  be  able  also  to  follow  out  in  one 
preeminently  important  case  the  connection  between 
banking  and  all  other  departments  of  economic  life.  The 
Bank  of  England  is  the  oldest  of  existing  European  banks. 
It  is  the  only  bank  which  for  nearly  two  hundred  years 
has  enjoyed  an  undisputed  reputation  and  a  predominant 
authority  within  its  somewhat  restricted  field.  The  evo- 
lution of  credit  and  exchange  in  the  economic  organization 
of  England  are  unintelligible  apart  from  the  bank  and  its 
monopoHstic  position,  and  therefore  the  influence  exer- 
cised by  credit  and  exchange  upon  the  general  economic 
development  is  part  and  parcel  of  the  history  of  the  bank. 
No  less  important  in  the  field  of  public  finance  were  the 
developing  relations  between  the  bank  and  the  State. 
From  its  establishment  onward  its  interests  and  the  inter- 
ests of  the  State  have  been  closely  intertwined.  Here 
especially  we  notice  a  peculiarity  in  the  relation  between 
the  Bank  of  England  and  the  English  economic  organism. 
Legally  the  bank  was  free  and  independent  of  the  Govern- 
ment, but  by  undertaking  public  functions  in  the  field  of 
exchange  it  gradually  became  an  organ  of  State  finance. 


23 


National      Monetary       Commission 

Various  continental  States  have  imitated  this  relationship. 
We  see  a  tendency  to  generalize  the  principle  of  using 
banks  to  make  and  receive  payments  for  the  States.  It  is 
certain  that  the  various  advantages  which  this  system  |^ 
offers  as  compared  with  the  system  of  State  treasuries 
entitle  it  to  universal  application.  Hence  this  side  espe- 
cially of  the  history  of  the  Bank  of  England  is  of  consider- 
able importance. 

It  is  for  this  reason  that  from  amongst  the  manifold 
phenomena  whose  investigation  is  suggested  by  a  study 
of  the  history  of  the  Bank  of  England  I  have  singled  out 
the  evolution  of  the  bank's  position  as  the  office  for 
administering  the  moneys  and  the  debts  of  the  State. 
All  previous  descriptions  of  the  history  of  this  bank — 
and  there  is  hardly  any  work  on  banking  which  does  not 
handle  some  important  part  at  least  of  its  history — pay 
no  attention  to  this  factor,  despite  its  indisputable  impor- 
tance in  the  evolution  of  the  bank. 

It  is  the  more  deserving  of  attention  in  that  the  German 
Empire  has  not  yet  completely  elaborated  a  banking  ad- 
ministration of  its  funds,  whilst  in  Austria  the  system  has 
not  been  introduced  at  all. 

It  seems,  therefore,  not  undesirable  to  draw  attention 
to  a  bank  which  was  the  first  to  develop  this  relationship 
to  the  State — at  least  if  we  confine  our  view  to  existing 
European  banks.  It  is  true,  of  course,  that  the  peculiar 
economic  conditions  of  this  country  make  it  impossible 
to  transfer  in  their  completeness  institutions  which  fit 
the  economic  life  of  England,  but  the  advantage  of 
studying  foreign  institutions  is  not  .exclusively  found  in 
imitation.     Such  study  is  calculated  rather  to  teach  us 


24 


The     English     Banking     S  y  stem 

how  universal  phenomena  develop  particular  forms  under 
the  influence  of  individually  differentiated  circumstances, 
and  as  we  consider  these  connections  we  become  able  to 
devise  new  applications  of  principle.  This  is  the  basis  of 
the  fact  that  we  so  often  look  abroad  with  good  success 
for  something  which  we  require  at  home. 

Dr.  Eugen  von  Philippovich. 
Vienna,  September,  1884. 


25 


PREFACE  TO  THE  SECOND  EDITION. 

Since  the  appearance  of  the  first  edition  of  this  book 
the  system  of  administering  funds  by  means  of  a  bank 
has  been  introduced  in  Italy  and  Holland.  In  the  Ger- 
man Empire  since  1896  and  in  France  since  1897  an  unde- 
niable advance  has  been  achieved  by  bringing  almost  all 
the  monetary  transactions  of  the  State  within  the  exchange 
system  of  the  note-issuing  banks,  although  even  to-day 
the  Imperial  Bank  and  the  Bank  of  France  are  used  merely 
to  transfer,  to  mobilize  public  funds,  not  to  administer 
them.  The  rapid  development  of  the  check  system  in 
the  last  generation  inevitably  demands  that  all  public 
business  should  become  a  part  of  the  intercourse  of  the 
money  market.  In  the  United  States  the  independent 
Treasury  administration  has  led  on  several  occasions  to 
serious  disturbances  of  the  business  world,  and  has  thus 
directly  suggested  the  reform  of  the  note  system  and  the 
creation  of  a  system  of  banking  which  would  enable  the 
State  to  leave  pubHc  funds  in  the  market  without  risk. 

In  the  present  edition  alterations  have  been  made  in  the 
introduction  and  the  concluding  chapter;  the  relation 
between  States  and  banks  of  issue  have  altered  greatly 
during  the  last  quarter  of  a  century,  the  question  of 
nationalizing  central  banks  may  be  regarded  as  settled. 
The  concluding  chapter  considers  the  importance  for  the 
London  money  market  of  the  fact  that  the  Bank  of  Eng- 
land acts  as  cashier  for  the  State.  The  numerous  changes 
in  legislation  have  been  thoroughly  considered.  The 
numerous  explanations  given  are  from  the  chief  cashier  of 
the  Bank  of  England,  Mr.  J.  G.  Nairne,  who  should  be 
mentioned  with  especial  gratitude. 

May,  191 1. 

27 


THE  BANK  OF  ENGLAND  AND  ITS  FINANCIAL 
SERVICES  TO  THE  STATE." 

INTRODUCTION. 

The  relation  of  the  State  to  economic  phenomena  may  be 
investigated  from  two  points  of  view.  If  we  regard  the 
State  as  the  foimtain  of  law,  the  authority  wliich  controls 
the  economic  intercom^se  of  individuals,  we  can  examine 
the  part  which  it  plays  in  shaping  economic  phenomena 
and  the  reactions  of  this  formative  influence  throughout 
the  economic  life  of  the  nation.  Our  attention  will  center 
as  a  rule  on  problems  of  maintaining  general  as  opposed  to 
particular  interests,  or  of  promoting  the  real  as  opposed  to 
the  imagined  interests  of  individuals.  Secondly,  we  may 
regard  the  State  as  itself  forming  an  independent  economic 
unit  and  inquire  what  part  it  takes  or  ought  to  take  in  the 
economic  life  of  the  nation.  In  this  case  we  shall  be  con- 
cerned with  the  economic  interests  of  the  State,  and  our 
part  will  be  to  lay  down  the  most  effective — i.  e.,  the  most 
economical — organization  of  its  administrative  activities 
with  regard  to  the  matter  in  hand.  Such  problems  belong 
to  the  science  of  administration  and  their  solution  is 
fotmd  usually  in  some  change  of  administrative  methods. 
They  have  also  a  certain  significance  for  the  economic  life 
of  the  nation,  since  that  life  is  so  closely  connected  with 
the  economic  activities  of  the  State  that  a  change  in  the 
latter  can  hardly  fail  to  react  upon  the  former. 

«  Translated  from  the  German  by  Christabel  Meredith. 

29 


National    Monetary     Commission 

We  may  therefore  examine  the  relation  of  the  State  to 
banking  from  two  aspects.  We  may  investigate  either 
the  influence  which  the  State  exercises  over  the  growth 
and  development  of  banking,  as  representative  of  the 
public  interest,  or  the  extent  to  which  it  shares  in  the 
services  of  banking  as  an  independent  economic  unit.  We 
shall  inquire  in  the  first  case  into  the  terms  of  the  law  of 
banking,  in  the  second  into  the  advantage  which  the  State 
may  secure  by  making  use  of  the  organized  system  of 
loans  and  payments  established  by  the  banks.  The 
opinions  which  were  held  about  banking  at  the  time  of 
its  first  appearance  display  a  mixture  of  confused  ideas 
about  the  functions  of  the  State  as  a  protector  of  com- 
mon interests,  and  about  the  real  or  imaginary  advan- 
tages of  economic  organization  which  the  State  might 
gain  from  the  banks.  The  peculiar  importance  which 
was  ascribed  to  the  banks  in  both  these  connections 
caused  the  State  to  exercise  a  far-reaching  influence 
over  their  formation.  Indeed  it  may  be  said  that,  in 
central  Europe,  at  any  rate,  until  well  into  the  nine- 
teenth century,  the  State  was  regarded  as  the  only 
sufficient  authority  for  the  creation  and  direction  of  a 
bank,  while  at  the  same  time  the  name  bank  was  used 
to  denote  institutions  of  the  most  widely  differing  types. 
This  confusion  in  respect  to  the  concept  of  a  bank  appears 
in  the  notion  that  any  establishment  may  be  regarded 
as  a  bank  in  which  money  can  be  deposited  for  safe  cus- 
tody under  public  guaranty,  and  removed  again  at  any 
time.  This  notion  had,  it  is  true,  been  modified  here  and 
there  by  the  end  of    the  eighteenth  century,   but   the 


30   . 


The     English     Banking     System 

essential  idea  of  a  guaranty  resting  on  the  good  faith  of 
the  community  was  still  universal." 

We  may  distinguish  three  fundamental  causes  which 
led  to  the  founding  of  public  institutions  authorized  to 
act  as  banks. 

Earliest  in  time  the  necessity  for  regulating  the  mone- 
tary system  and  maintaining  order  therein  in  the  midst 
of  a  general  confusion  of  coins,  induced  communities  to 
establish  institutions  where  specie  or  coin  were  accepted 
at  any  time  on  the  basis  of  a  monetary  standard,  whether 
actually  coined  or  not,  at  a  generally  acknowledged  value 
and  was  kept  as  depositum  irreguläre.  Since  these  insti- 
tutions also  undertook  to  make  payments  and  allowed 

o  Nasse  makes  it  probable  that  in  Venice  at  least  a  banking  system  not 
dependent  upon  the  State  existed  until  the  end  of  the  sixteenth  century 
("Jahrbuch  für  Nationalökonomie  und  Statistik,"  1879,  p.  348).  Butaccord- 
ing  to  Endemann  throughout  Italy,  even  in  the  earliest  times,  to  discount 
and  deposit  banks  were  obliged  to  obtain  a  concession  from  the  govern- 
ment and  to  give  seciu-ity  for  this  permission  to  carry  on  their  busi- 
ness. The  bankruptcies  which  occurred  in  spite  of  this  led  men  on  in  the 
fifteenth  and  sixteenth  centuries  to  the  creation  of  state  banks  ("Studien  in 
der  rom.  kan.  Wirthschaftslehre,"  1874,  pp.  99,  106  and  426).  In  Germany 
even  the  business  of  the  exchange  of  money,  as  arising  out  of  the  sovereign's 
right  of  coinage,  was  a  monopoly  of  the  ruler.  (Cf.  Becher,  "Ursachen  vom 
Auf- und  Abnehmen  der  Städte"  3d  ed.,  1688,  p,  274;  Poschinger, "Bankwesen 
und  Bankpolitik  in  Preussen,"  Vol.  I,  1878,  p.  5  et  seq.)  Similarly  in  Eng- 
land (Schanz,  "Engl.  Handelspolitik,"  Leipzig,  1881,  Vol.  I,p.  519).  With 
regard  to  the  business  of  bill  broking  on  the  other  hand,  this  can  not  be 
proved.  But  all  the  statements  relative  to  banks  made  by  German  authors 
of  the  seventeenth  and  eighteenth  centuries  imply  that  these  institutions 
were  guided  or  at  least  guaranteed  by  the  Commonwealth.  (Cf.  Schröder, 
"Fürstl. Schatz-  und  Rentkammer,"  5th  ed.,  1752,  p.  234;  Becher,  op.  cit., 
p.  297;  Marperger,  "Beschreibung  d.  Banken,"  1717,  p.  352;  Justi,  "Staats- 
wirthschaft,"  Vol.  I,  1758  pp.  190,  279;  J.  K.  May,  "Einleitung in  die  Hand- 
lungswissenschaft," Vol.  I,  1763,  p.  25 8;  Sonnenfels,  "Grundsätze  der  Polizei- 
und  Finanzwissenschaft,"  Vol.  III,  1776,  p.  275;  "Geschichtliche  Darstellung 
der  Banken,"  Hamburg,  1800,  p.  3.  Ample  proof  that  this  principle  was 
carried  out  in  practice  in  the  German  States  is  afforded  by  the  history  of 
banking  in  these  States,  as  detailed  by  Poschinger  in  his  valuable  works. 


31 


National     Monetary     Commission 

checks  to  be  drawn  on  them  by  their  customers,  they  sup- 
phed  for  the  transactions  carried  on  within  the  circle  of 
persons  connected  with  them  what  the  legal  medium  of 
exchange  in  general  did  not  supply,  a  secure  and  steady 
means  of  payment.  This  constitutes  the  great  economic 
significance  of  these  institutions  and  also  explains  the  fact 
that  the  commimity  alone  was  looked  upon  as  entitled  to 
create  and  administer  them.  Security  of  economic  ex- 
change in  a  town  or  throughout  a  countr>'  could  not  be 
built  up  on  the  credit  of  an  individual  or  of  a  private  com- 
pany. Thus  these  institutions  appeared  first  in  Italy 
under  the  name  of  hanchi  del  giro,  and  at  the  beginnhig 
of  the  seventeenth  century  in  rapid  succession  at  Amster- 
dam, Hamburg,  and  Nürnberg.  Their  powerful  influence 
upon  national  economic  life  is  shown  by  the  fact  that  their 
characteristic  functions — the  custody  of  money  and  the 
discharge  of  payments — dominated  for  nearly  two  hundred 
years  the  conceptions  of  what  constituted  banking. 

The  idea  of  turning  to  account  some  portion  of  the  idle 
capital  deposited  in  the  girobanks  must  have  followed 
quickly  upon  their  foundation.  It  is  stated  that  a  loan 
bank  was  combined  with  the  girobank  in  Hamburg  soon 
after  the  establishment  of  the  latter." 

It  must  be  assumed,  however,  that  the  concejjiion  of 
banks  as  purely  credit  institutions  belongs  to  the  more 
developed  view  of  a  later  period  and  forms  the  second 
stage  in  the  development  of  banking.  It  did  not  become 
part  of  the  general  thought  of  Europe  initil  toward  the 
end  of  the  seventeenth  century.  Here  again  we  find  the 
State  regarded  as  responsible  for  meeting  the  economic 

o  "Geschichtl.  Darstellung,  etc.",  p.  78. 

32 


The     English     Banking     System 

needs  of  the  nation  by  the  creation  of  institutions  to  sup- 
ply credit,  and  to  be  no  longer  merely  deposit  or  transfer 
banks.  Nearly  all  the  projects  which  arose  after  the  end 
of  the  seventeenth  century,  out  of  a  conception — a  con- 
ception at  times  fantastic — of  the  use  and  value  of  banks, 
have  this  point  in  common.  Loan  offices  {monies  pietatis) , 
institutions  for  the  issue  of  bills  on  the  security  of  real 
or  personal  property,  are  to  be  the  means  of  fertiliz- 
ing economic  exchanges  and  enriching  the  community. 
No  one  doubted  that  the  creation  of  such  institutions  are 
the  exclusive  privilege  of  the  State.  The  view  that  the 
function  of  the  State  ends  with  the  foundation  and 
does  not  extend  to  the  management  prevailed  in  England 
alone. 

If  we  select  for  examination  from  among  the  institu- 
tions actually  founded  on  the  basis  of  projects  of  this 
kind,  those  which  in  virtue  of  their  organization  and 
functions  would  still  be  called  banks  according  to  our 
present  day  ideas,  we  shall  find  it  at  first  sight  impossible 
to  deny  to  the  Governments  of  the  eighteenth  century  the 
merit  of  having  furnished  all  possible  support  to  the 
organization  of  credit  by  the  foundation  of  banks.  No 
single  State  was  without  its  project  for  a  bank,  and  there 
are  but  few  in  which  such  projects  did  not  multiply  in 
astonishing  fashion,  until  at  last  a  bank  was  established. 
A  closer  examination  shows  us,  however,  that  hardly  any 
of  these  banks  owe  their  foundation  merely  to  the  desire 
to  promote  the  economic  life  of  the  nation.  Indeed,  it 
appears  to  me  that  of  all  the  banks  whose  history  is  known 
the  Banco  di  Depositi,  established  in  Leipzig  in  1698,  was 
alone  not  provided  with  other  functions  from  the  outset, 

68299°— II — -3  ^:^ 


National    Monetary     Commission 

and  was  the  one  bank  which,  according  to  the  law  estab- 
Hshing  it,  was  intended  to  make  its  way  by  combined 
lending  and  borrowing  transactions — the  one  bank,  that 
is,  at  whose  establishment  the  advantage  of  fostering 
credit  was  the  one  thing  considered. 

In  the  case  of  all  other  banks,  and  especially  of  those 
giant  institutions  which  appear  in  the  annals  of  banking  as 
the  centers  of  the  credit  transactions  of  entire  nations,  the 
need  of  capital  and  credit  in  the  economic  life  of  the  nation 
was  not  the  sole  cause  and  occasion  of  their  establishment ; 
the  credit  requirements  of  the  State  itself  were  an  impor- 
tant additional  consideration  which  often  turned  the  scale. 
By  taking  in  hand  the  establishment  of  a  bank  the 
State  seemed  able  to  increase  the  confidence  of  its  credi- 
tors whom  it  admitted  tobe  shareholders  in  the  institution, 
to  attract  home  and  foreign  capital  through  expectation 
of  profit,  and  in  a  certain  sense  to  "create"  capital  by  the 
issue  of  notes.  Banking  came  to  be  regarded  as  a  mys- 
tery of  State  (Schröder),  and  no  Government  hesitated 
to  adopt  that  means  of  obtaining  succor  in  financial 
difficulties.  Public  credit  became  so  closely  associated 
with  bank  credit  that  even  in  the  minds  of  otherwise 
clear-sighted  persons  the  two  conceptions  could  not  be 
distinguished.«  The  idea  of  gain  to  the  general  public  no 
longer  appears  in  these  cases;  the  leading  motive  for 
establishing  banks  is  rather  the  interest  of  the  State. 
This  marks  the  third  stage  in  the  early  development  of 
banking.  Attempts  were  made,  it  is  true,  to  defend  the 
conduct  of  the  banks  by  arguments  drawn  from  the  needs 

oThus  Sonnenfels  in  his  "Grundsätzen  der  Polizei-Handlungs-  und 
Finanzwissenschaft"  writes:  "The  constitution  of  a  bank  of  this  kind 
(i.  e.,  a  loan  bank)  cannot  be  clearly  described  without  defining  public 
credit." 

34 


The     English     Banking     System 

of  business  intercourse,  but  this  did  not  save  the  banks 
from  being  exploited  by  the  State  in  a  most  unbusinessHke 
manner;  sometimes,  indeed,  their  constitution  was  from 
the  first  such  as  to  make  them  institutions  for  the  raising 
and  administration  of  pubhc  loans  rather  than  banks. 
The  most  striking  example  of  a  bank  of  this  kind  is  the 
Banco  del  Giro,  established  in  Vienna  by  the  Emperor 
Leopold  I  in  1703,  and  reconstituted  in  1704.  The  essen- 
tial functions  of  this  institution  were  to  accept  the  gov- 
ernment bills  issued  by  the  Exchequer,  to  enter  the  sums 
due  to  the  creditors  to  their  account  in  its  books,  as  a 
transfer  capital,  so  that  these  amounts  could  be  disposed 
of  in  separate  sums  by  means  of  transfers,  and  to  discharge 
state  debts  at  fixed  intervals  by  means  of  the  taxes  paid 
in,  or  of  such  private  deposits  as  might  have  come  in  for 
investment.  This  is  probably  the  clearest  instance  of  the 
creation  of  a  bank  with  the  distinct  intention  of  strength- 
ening public  credit.  A  similar  lack  of  significance  for  the 
development  of  the  economic  life  of  the  nation  was  dis- 
played by  many  other  banks  of  the  period,  which,  although 
founded  with  more  judgment,  came  to  a  speedy  end  owing 
to  the  excessive  claims  of  the  State,  to  which  they  were 
expected  to  serve  as  an  inexhaustible  source  of  money." 

«  A  detailed  examination  of  the  history  of  banking  in  the  eighteenth 
century  is  not  necessary  for  the  purposes  of  this  introduction,  where  it  is 
only  intended  to  point  out  the  share  taken  by  the  State  at  that  time  in 
the  foundation  of  banks.  The  examples  cited  are  enough  to  show  what 
far-reaching  effects  on  the  erection  of  banks  followed  from  the  idea  of 
making  them  of  service  to  public  credit.  For  a  complete  treatment  of 
the  history  of  banking  in  Austria,  which  is  especially  instructive  in  this 
connection,  see  Schwabe- Waisenfreund,  "Versuch  einer  Geschieht  der 
österreichischen  Staatscredits  und  Schuldenwesens,"  2  vols.,  1866;  Bieder- 
mann, "  Die  Wiener  Stadt-Bank,"  1858.  For  Germany,  Poschinger's  works 
on  banking  history  are  the  most  important  source.  France  affords 
only  one  example,  the  sufficiently  well-known  attempt  under  Law.  The 
position  in  England  will  receive  detailed  consideration  in  what  follows. 

35 


National     Monetary     Commission 


It  is  a  significant  fact  that  the  credit  requirements, 
whether  of  the  nation  at  large  or  of  the  State,  were  met, 
not  by  accumulation  of  capital  in  deposit  banks — the  few 
experiments  in  this  direction  had  little  success— but  by 
issue  of  notes  guaranteed  by  the  State.  An  inquiry  into 
the  reason  for  this  would  lead  us  too  far.  We  may,  \\o\\- 
ever,  emphasize  the  importance  in  the  evolution  of  bank 
notes  of  the  fact  that  their  use  began  at  a  time  when  the 
prevailing  opinion  regarded  banking  as  a  state  preserve. 
The  monopoly  of  note  issue  required  no  theoretical  basis 
when  it  was  introduced.  It  arose  naturally  out  of  the 
existing  relations  between  the  State  and  banking. 

The  now  famous  suspension  of  cash  payments  by  the 
Bank  of  England  in  the  year  1797  and  the  resultant  fluc- 
tuation in  the  value  of  its  notes  gave  rise  to  a  theoretical 
discussion  and  a  veritable  literature.  Not  until  this  had 
happened  did  the  relation  of  the  State  to  note  issues  and 
hence  to  banking  in  general  become  the  subject-matter 
of  a  systematic  inquiry  into  fundamental  principles. 
Banking  rose  to  increased  importance  in  the  nineteenth 
century,  owing  to  the  development  of  commerce.  Orig- 
inally, banks  had  merely  been  distinguished,  so  far  as  their 
function  was  concerned,  into  two  classes,  transfer  {giro) 
and  loan  banks,  and  the  most  varied  types  of  loan  histitu- 
tions  had  been  grouped  together;  now  this  miiform  con- 
ception of  banking  and  of  the  influence  of  the  State  over 
banks  came  to  an  end.  It  no  longer  sufficed  to  speak  of 
banking  in  general  when  once  the  varied  conditions  of 
credit  facilities  were  recognized.  Transfer,  deposit,  note 
issuing,  and  mortgage  banks  were  distinguished  as  sepa- 
rate entities,  each  possessing  its  own  economic  function, 

36 


The     English     Banking     System 

to  which  its  constitution  and  management  must  be 
adapted.  Besides,  a  changed  conception  of  the  relation 
of  the  State  to  economic  phenomena  in  general  had  grown 
up.  State  interference  with  economic  relations  was  re- 
jected as  a  superfluous  and  even  as  an  injurious  tutelage. 
The  economic  advantage  of  the  community  seemed  to  be 
best  secured  when  each  individual  was  permitted  to  assert 
his  own  particular  interest.  The  legal  privilege  of  class 
and  guild  had  given  place  to  a  law  which  dismissed  dis- 
tinctions of  personal  position  in  favor  of  distinctions  of 
actual  fact.  The  law  merchant  had  given  birth  to  com- 
mercial law,  while  freedom  of  association  and  the  law  of 
companies  replaced  the  charters  of  individual  corporations. 

In  banking,  this  liberating  tendency  made  itself  felt  first 
in  the  permission  to  establish  banks  subject  to  the  ordinary 
rules  of  law,  and  which  did  not  desire  to  carry  on  the  same 
class  of  business  as  the  banks  which  were  either  managed 
by  the  State  or  had  received  privileges  from  it  and  were 
strengthened  by  its  guaranties.  The  privileges  and  mo- 
nopoly of  note  issues,  however,  continued  to  exist  as  a  last 
siuvival  of  the  state  banking  system  of  an  earlier  period. 

They  were  not,  however,  based  as  formerly,  on  a  belief 
in  the  exclusive  banking  rights  of  the  State,  but  on  purely 
econmic  reasons — on  the  need  for  a  centralized  monetary 
system  and  for  an  organization  wliich  should  afford  strong 
support  to  the  money  market  in  times  of  crisis. 

The  establishment  of  banks  by  the  State  supplied  a 
means  for  the  easier  raising  of  loans.  Banks  which  were 
destined  to  raise  and  repay  such  loans  must  inspire  con- 
fidence in  the  public  creditors,  and  the  economic  charac- 
ter of  the  institutions  must  offer  a  guarantee  for  the  punc- 
tuality of  the  Government   payments.     At   the  present 

37 
»    -a.  O"   i,/  %./ 


National    Monetary     Commission 

day  confidence  in  the  fulfillment  of  Government  obliga- 
tions rests  on  the  constitutional  nature  of  public  admin- 
istration, on  the  publicity  of  national  expenditure,  and 
on  the  control  of  the  latter  by  a  representative  Govern- 
ment.    A  material  guarantee  is  no  longer  needed. 

The  great  increase  in  floating  capital  has  continuously 
narrowed  the  function  of  banks  in  respect  to  the  issue  of 
public  loans;  in  the  mid-Enropean  States  their  share  is 
limited  to  the  sale,  either  on  commission  or  by  a  definite 
undertakmg,  sometimes  on  a  guarantee  in  case  of  deficit, 
which,  however,  under  existing  conditions  of  the  money 
market,  in  no  case  results  in  permanent  possession  of 
the  stock,  but  only,  in  unfavorable  circumstances,  in  a 
temporary  ownership;  for  such  functions  the  deposit 
banks  and  post-ofiice  savings  banks,  with  their  close 
connection  with  investors,  are  better  suited  tlian  the 
banks  of  issue.  In  rich  countries  like  England  and  France 
the  Government  can  sell  its  stock  direct  to  the  public,  so 
that  the  banks  supply  merely  technical  assistance — the 
acceptance  of  offers  of  subscription — and  no  materia! 
cooperation. 

Except  in  the  United  States,  where  the  note  issue  is 
based  on  the  possession  of  consols,  the  system  of  public 
debt  develops  independently  of  the  banks  of  issue.  Dur- 
ing the  last  generation  no  important  State,  except  France, 
has  raised  a  permanent  loan  through  its  central  bank,  and 
the  loans  so  raised  in  the  past  now  form  an  increasingly 
small  part  of  the  total  public  debt. 

Although  the  close  connection  between  the  State  and 
the  banks  which  formerly  existed  in  regard  to  the  note 
issue  and  the  public  debt  has  now  ceased,  the  connection 

38 


The     English     Banking     System 

between  the  two  in  the  matter  of  money  transfers  is  con- 
tinuaUy  strengthening.  This  is  no  matter  of  an  excep- 
tional relation  between  the  Government  and  the  banking 
system,  but  of  an  extensive  use  of  the  latter  for  Govern- 
ment payments  on  a  basis  similar  to  that  employed  for 
private  transactions.  For  the  Government  this  means 
a  simplification  of  the  system  of  payments  and  accounts; 
for  the  community  the  inclusion  of  the  Government 
money  transactions  in  those  of  the  money  market.  The 
wider  the  credit  transactions  and  the  more  sensitive  the 
money  market,  the  stronger  will  be  the  demand  that 
Government  business  should  not  be  carried  on  outside 
this  organization. 

The  employment  of  banks  as  agents  for  public  payments 
began  in  different  ways  in  the  several  European  States, 
and  is  still,  except  in  England,  a  fairly  recent  practice. 
Although  the  idea  was  not  unknown  in  earlier  times,"  it  is 
only  during  the  last  century  that  banks  have  been  defi- 
nitely brought  into  the  administration  of  public  finance 
as  the  channel  through  which  state  payments  are  made.  In 
England,  France,  Belgium,  the  Netherlands,  Italy,  and  also 
in  the  German  Empire,  public  treasuries  have  been  replaced 
by  banks,  and  hence  the  balance  of  public  money  in  hand 

«  Maxperger,  Beschreibung  der  Banquen,  1717,  states  that  "All  pensions, 
prize  money,  and.  important  civil  list  payments  which  a  government  or 
republic  gives  to  its  ministers  and  civil  servants  must  be  taken  from  the 
treasure  chamber  or  treasury  in  bank  money  to  the  bank,"  where  it 
becomes  the  property  of  the  individuals  entitled  to  it  (p.  116).  The  sov- 
ereign also  ought  to  have  an  account  at  the  bank  and  to  hand  over  his 
revenue  to  it.  This  will  not  injure  the  financial  system,  but,  just  as  a  great 
merchant  in  Amsterdam,  Hamburg,  or  Venice  looks  after  his  business  and 
is  supported  by  the  bank,  "so  will  it  be  with  the  noble  finance  ministers, 
who  can  well  make  use  of  the  support  of  such  a  bank  in  order,  to  lighten 
their  business"  (p.  118). 


39 


National     Monetary     Commission 


has  been  combined  with  the  capital  which  the  banks  have  at 
their  disposal  to  meet  the  demands  of  the  commmiity  for 
credit.  This  leads  to  a  diminution  in  the  actual  amount 
of  the  public  balances.  They  can  be  kept  smaller  when 
the  public  money  is  managed  by  a  bank  than  on  the 
treasury  system.  The  maximum  necessary  amount  of 
these  balances,  having  regard  to  the  liabilities  of  the 
State,  is  dependent  at  any  given  time  on  their  geographical 
distribution,  on  the  amount  of  the  receipts  which  may 
be  counted  upon,  and  on  the  speed  with  which  money 
can  be  dispatched  to  the  places  where  payment  is  to  be 
made.  Alterations  in  regard  to  the  geographical  distri- 
bution of  public  liabilities  and  the  transfer  of  money 
follow  from  the  technical  advantages  afforded  by  the 
banks,  and  this  enables  the  State  to  reduce  its  balances. 
The  balances  still  retained  and  not  required  for  the  dis- 
charge of  liabilities  are  employed  by  the  bank,  and  a 
considerable  sum  thus  ceases  to  be  useless  capital  in  the 
public  treasury.  Among  the  payments  due  from  the 
State  which  are  taken  over  by  the  banks,  those  arisuig 
out  of  the  public  debt  are  not  the  least  numerous,  and 
this  has  brought  about  a  further  intrusion  of  the  banks 
into  the  work  of  financial  administration,  tliough  here  also 
it  is  the  technical  side  only  of  debt  administration  with 
which  they  are  concerned.  In  particular,  the  bookkeeping 
connected  with  loans  raised  on  the  system  of  a  payment 
of  yearly  interest  is  in  the  hands  of  banks  ui  both  England 
and  Belgium. 

The  extent  to  which  banks  are  used  as  instruments  of 
financial  administration,  whether  of  debts  or  monetary 
transactions,  differs  widely  from  one  country  to  another. 
In  Germany  and  France  the  banks  are  used  less  for  making 


40 


The     English     Banking     System 

payments  than  for  the  geographical  distribution  of  the 
pubUc  cash  balances.  Only  in  England  and  in  Belgium 
has  the  business  of  the  public  treasury  been  entirely  taken 
over  by  the  banks.  And  only  in  England  is  there  any- 
thing that  can  properly  be  called  a  history  of  this  arrange- 
ment. In  Belgium  it  was  carried  out  of  deliberate  pur- 
pose, it  happened  all  at  once.  In  England  it  developed. 
It  grew  up  by  degrees,  in  the  course  of  a  century,  without 
any  legislative  interference.  Owing  to  the  special  way  in 
which  public  money  was  administered  the  Government 
merely  sanctioned  what  the  personal  administration  of 
its  Ministers  had  already  brought  to  pass.  The  comple- 
tion of  the  system  in  matters  of  detail  was  brought  about, 
it  is  true,  by  legislative  action  in  the  nineteenth  century, 
but  the  principle  was  established  by  a  process  of  practical 
evolution. 

Hence,  even  in  the  eighteenth  century,  the  Bank  of 
England  stood  in  a  relation  to  the  State  entirely  different 
from  that  of  the  continental  banks.  Researches  into  the 
history  of  this  Bank,  except  as  regards  the  account  of  its 
foundation,  usually  begin  only  with  the  year  1797.  The 
events  of  this  year  for  the  first  time  attracted  attention 
to  the  Bank  in  Europe;  but  in  the  interval  between  the 
date  of  its  foundation  and  this  year  the  Bank's  relation  to 
the  State  had  developed  to  an  important  extent,  and  this 
not  only  from  a  financial  standpoint,  but  by  an  imsys- 
tematic  connection,  which  grew  up  purely  through  the 
free  action  of  the  officials  concerned  with  the  whole 
business  of  managing  the  public  money.  It  was  chiefly 
in  this  way  that  the  Bank  secured  that  overwhelming 
influence  which  subsequently  dominated  the  history  of 
the  English  bank-note  system,   which  does,   it  is  true, 

41 


National    Monetary     Commission 

begin  in  1797.  This  influential  position  is  one  of  the  main 
bases  of  its  briUiant  history,  and  especially  of  the  fact 
that,  unlike  so  many  of  the  other  banks  founded  at  the 
end  of  the  seventeenth  century,  it  had  not  a  merely 
ephemeral  existence. 

In  the  following  chapters  we  shall  describe  the  develop- 
ment of  these  relations  between  the  Bank  of  England  and 
the  English  financial  administration,  and  the  form  which 
they  present  to-day. 

In  so  doing  we  shall  fill  up  a  gap  in  the  history  of  the 
Bank  of  England,  and  further  shall  demonstrate  the  great 
advantages  which  even  in  our  own  day  may  accrue  to  the 
State  on  the  economic  side  from  the  organization  of  bank- 
ing. We  shall  not  enter  into  the  history  of  the  Bank 
regarded  as  a  factor  in  the  economic  growth  of  the  nation. 
Our  special  concern  will  be  its  connection  with  the  eco- 
nomic activities  of  the  State.  But  in  describing  the  foun- 
dation of  the  Bank  we  shall  deal  briefly  with  both  sig- 
nificant aspects.  The  Bank  arose  as  a  result  of  the 
requirements  both  of  the  State  and  of  the  community  at 
large.  But  a  somewhat  intimate  analysis  of  these  causes 
is  particularly  desirable  in  view  of  the  fact  that  incorrect 
estimates  are  widely  held  of  the  importance  of  the  Bank  of 
England  to  the  public  administration  at  the  time  at  which 
it  was  founded.  These  estimates  claim  for  it  a  position 
in  those  early  years  which  it  did  not  secure  till  more  than 
a  century  later." 

«It  must  be  recognized  that  Stein  was  the  first  tu  give  a  partially  correct 
estimate  of  the  relatione  between  the  Bank  of  England  and  the  adminis- 
tration of  public  finance,  but  his  exjjlanation  of  the  origin  of  these  relations 
is  incorrect.  (Cf.  Stein,  "Finanzwissenschaft,"  4th  ed.,  Vol.  I,  p.  97,  Vol. 
II,  p.  484,  et  seq.,  and  the  statements  in  what  follows.) 


42 


PART  I. 

THE  FOUNDATION  OF  THE  BANK  OF  ENGLAND. 

I.  THE  DEVELOPMENT  OF  ENGUSH  ECONOMIC  ORGANIZATION 
DURING  THE  SEVENTEENTH  CENTURY  WITH  SPECIAL  REFER- 
ENCE TO  THE   LOAN    SYSTEM. 

We  have  already  pointed  out  that  with  few  exceptions 
banks  made  their  earUest  appearance  under  the  auspices 
of   the   State.     This    state    intervention   was,    however, 
merely   an   external   stimulus   to   the   erection   of   such 
banks-a    necessary    condition    rather    than    the    cause 
thereof.     No   bank  can  be  established   or  can  prosper 
unless  it  satisfies  a  widespread  and  clearly  recognized 
economic  need.     Such  an  institution  if  called  into  exist- 
ence merely  to  satisfy  the  demands  of  a  Government, 
lacks  from  the  outset  the  conditions  necessary  for  its 
success.     The  Austrian  Banco  del  Giro  was  an  example 
of  this.     In  England  the  conditions  were  different.     Here 
a  steady  growth  in  economic  wealth  and  vigor  and  a 
rapidly  increasing  commerce  combined,  during  the  seven- 
teenth century,  to  arouse  an  undeniable  demand  for  some 
institution  which  should  afford  credit  facilities. 

The  foundations  of  that  English  economic  prosperity 
which  is  so  striking  to-day  were  laid  in  the  seventeenth 
century.  English  history  during  this  period  finds  its 
significance  in  the  transition  from  the  limited  production 
and  restricted  trade  of  the  Middle  Ages  to  the  world  com- 
merce of  modern  times.  Moreover,  an  important  change 
in  the  position  of  England  took  place  between  the  begin- 


43 


National     Monetary     Commission 

ning  and  end  of  the  century.  How  great  the  contrast 
between  the  year  1609,  when  an  attempt  was  made  for 
the  first  time  °  to  replace,  by  a  copper  coinage,  the  lead 
tokens,  which  had  hitherto  been  used  in  minor  trans- 
actions,^ and  the  year  1694,  when  the  first  bank  note 
circulated  in  England! 

In  1607  the  royal  fleet  possessed  but  40  ships  of  50  or 
more  tons  burden;  in  1695  the  number  of  such  vessels 
was  over  200.  <^  Before  the  Navigation  Act  English  mer- 
chants shipped  their  goods  for  the  most  part  in  Dutch 
trading  vessels/  After  this  act  the  trade  to  and  from 
England  was  in  the  hands  of  Englishmen,  while  the 
tonnage  of  the  English  merchant  service  was  doubled  in 
twenty  years/  The  legal  rate  of  interest,  which  in  1600 
was  still  10  per  cent,  was  reduced  to  8  per  cent  in  1624 
and  to  6  per  cent  in  166 1./  In  1600  the  proceeds  of  the 
land  tax  were  valued  at  £6,000,000  only;  in  1698  Dave- 
nant  estimates  them  at  £14,000,000.  The  English  tex- 
tile industry  made  slow  but  steady  progress  and  won  its 
independence  from  the  Dutch,  so  that  whereas  during 
the  first  half  of  the  century  the  cloth  was  sent  to  Holland 
to  be  finished  and  dyed,  in  1699  Davenant  calculates  that 
woolen  goods  make  up  a  fifth  part  of  the  total  exports, 

o  [Sir  R.  Cotton  proposed  a  coinage  of  copper  coins  in  1609.  According 
to  Lord  Liverpool,  "Copper  coins  were  first  made  by  royal  authority 
in  the  eleventh  year  of  James  I,  that  is,  1613."  "Treatise  on  the  Coins 
of  the  Realm,"  1805,  pp.  129-130.  These  coins  were  farthings  only. 
H.  S.  Foxwell.] 

0  Anderson,  "  History  of  Commerce  "  a.  1609.  The  prohibition  of  private 
coins  was  repeated  in  1625  and  in  1649. 

c  Anderson,  a.  1695. 

<^  Jean  de  Witt.     "M6moires"  1709,  p.  29. 

«Anderson,  a.  1688. 

/Schanz,  loc.  cit.,  p.  562. 


44 


The     English     Banking     System 

which  total  is  estimated  at  £7,000,000.  The  persistent 
pohtical  and  rehgious  quarrels  which  prevailed  through- 
out the  country  during  the  century  did  not  prevent  union 
in  economic  matters.  The  economic  strength  of  the  Eng- 
lish grew  without  interruption  in  spite  of  the  numerous 
changes  in  the  form  of  government  and  of  the  conflict- 
ing principles  which  dominated  the  administration. 

A  study  of  English  economic  history  during  the  seven- 
teenth century  reveals  two  factors  as  determining  the 
economic  greatness  of  the  country — the  colonial  policy 
and  the  regulations  which  accompanied  it  in  the  sphere 
of  economic  administration.  The  great  discoveries  of  the 
sixteenth  century  were  exploited  during  the  seventeenth 
century  by  the  commercial  nations  in  Europe.  Holland 
and  England  stood  at  the  head  of  the  movement.  The 
result  was  a  transference  to  the  northern  States  of  the 
economic  supremacy  in  Europe,  previously  held  by  the 
Italian  Republics.  The  East,  which  was  the  legendary 
home  of  the  European  peoples  and  which  formed  in  addi- 
tion the  material  basis  of  their  prosperity,  was  visited 
by  newly  discovered  routes,  and  yielded  its  treasures  to 
the  nations  who  proved  able  to  use  the  advantages  of 
their  maritime  position  with  vigor  and  with  economic 
skill.  The  efforts  to  find  the  shortest  route  to  wealthy 
India  led  to  numerous  voyages  for  the  discovery  of  a 
northwest  passage.  The  result  was  the  colonization  of 
North  America  by  the  English,  who  had  taken  a  leading 
part  in  the  enterprise.  Although  the  East  India  Com- 
pany had  made  regular  voyages  to  the  East  Indies  since 
1600,  the  English  were  slow  to  settle  in  America.  Vir- 
ginia was  founded  in  1606;  New  England  in  1620;  Mary- 


45 


National    Monetary     Commission 

land  in  1635.  The  settlements  gradually  spread  toward 
the  north  and  south  until,  by  the  middle  of  the  century, 
the  English  possessions  in  North  America  had  reached 
their  widest  extent.«  The  colonies  were  wisely  managed 
and  their  permanent  economic  value  was  made  the  first 
consideration  in  contrast  to  the  Spanish  thirst  for  gold. 
This  was  the  common  opinion  as  expressed  by  numerous 
writers,  and  it  was  recognized  that  England  administered 
her  colonies  with  a  view  to  slow  but  lasting  profit  and 
not  to  secure  sudden  riches.'' 

As  a  consequence  English  relations  with  the  colonies 
were  based  upon  a  definite  economic  system  of  exchange. 
The  colonies  were  to  supply  England  with  raw  materials 
of  all  kinds.  England  was  to  find  a  market  in  her  colo- 
nies for  her  manufactured  goods.  Commerce  and  trade 
in  colonial  products  was  not  the  only  object ;  it  was  also 
desired  that  these  products  should  1k'  worked  up  in  Eng- 
land. If  this  were  attained  England  need  no  longer  carry 
on  her  foreign  trade  with  gold,  but  could  exchange  her 
industrial  products  for  other  goods  and  secure  a  consid- 
erable surplus,  turning  the  balance  of  trade  in  her  favor. 
Such  ideas  were  frequently  enough  expressed  in  writings, 
in  speeches,  and  in  Parliament,  in  reference  to  the  accusa- 
tion brought  against  the  East  India  Company  lliat  it  sent 
large  sums  of  gold  out  of  the  country  every  year.  No 
logical  or  consistent  system  of  economic  administration 
was  attained  during  this  century.  England  produced  no 
Colbert  before  Robert  Walpole.     But  the  regulations  for 

oCf.  Roscher,  "Colonien,  Colonialpolitik  und  Auswanderung,"  1856, 
p.  208. 

ft  Roscher,  loc.  cit.,  p.  243.  "Zur  Geschichte  der  englischen  Volkswirth- 
schaftslehre,"  Leipzig,  185 1,  chap.  3. 

46 


The    English     Banking    System 

the  development  and  protection  of  home  industry,  of  ship- 
ping, and  of  commerce,  led  ultimately,  by  a  succession  of 
efforts  carried  out  piecemeal,  to  a  similar  result — an  in- 
crease in  the  production  and  commercial  resources  of  the 
country.  The  encouragement  given  to  the  settlements  of 
French  and  Dutch  emigrants  through  whom  new  knowl- 
edge and  skill  were  introduced  into  many  industries,  the 
careful  protection  accorded  to  new  branches  of  industry, 
the  active  care  of  which  the  textile  industries  in  particular 
were  the  object,  all  were  effective  methods  of  competition 
witli  Holland,  the  country  of  greatest  economic  impor- 
tance at  this  time.  How  jealously  the  Dutch  woolen 
industry  was  watched  is  shown  by  the  proposal  made  in 
1 65 1  to  buy  up  all  the  Spanish  wool  in  order  to  deal  a 
severe  blow  at  Holland,  where  this  wool  was  excellently 
worked  up. 

This  jealousy  of  Holland  resulted,  in  the  same  year,  in 
the  now  famous  Navigation  Act.  The  object  of  this  act 
was  to  secure  for  England  a  monopoly  of  the  carrying 
trade  from  its  own  ports.  The  English  nation  was  to  be 
forced  to  develop  its  merchant  service  imder  the  protec- 
tion of  a  draconian  prohibition  of  the  foreign  carrying 
trade.  The  Navigation  Act  was  directed  against  the 
English  colonies  as  well  as  against  foreigners,  and  this 
especially  after  it  was  made  more  stringent  in  1660  and 
in  1663.  No  goods  might  be  brought  into  the  colonies 
except  in  an  English  ship  under  an  English  captain.  By 
this  means  a  wider  field  was  opened  up  for  English  indus- 
tries as  well  as  for  English  commerce.  "The  colonies 
were  to  remain  undeveloped  country,  for  which  England 


47 


National     Monetary     Commission 

served  as  the  industrial  and  commercial  town."«  Seldom 
has  an  economic  regulation  been  so  completely  justified 
by  its  results  as  the  Navigation  Act,  the  magna  charta 
maritima,  as  Child  called  it. 

The  gradual  and  piecemeal  fulfilment  of  desires  leads 
however  to  continually  increasing  demands  for  more  com- 
plete satisfaction,  and  complaints  of  the  decay  and  ruin  of 
English  commerce  continued  throughout  the  century  in 
spite  of  the  undeniable  and  increasing  development  of 
economic  prosperity.  And  it  is  always  the  Dutch  whose 
freedom,  whose  industries,  whose  commerce,  whose  power 
as  capitaHsts  are  held  up  as  models  in  every  branch  of 
economic  organization.  The  non-attainment  of  this  ideal, 
while  it  gives  ground  for  complaint,  serves  also  as  a 
stimulus  for  renewed  effort.  The  jealousy,  to  which  we 
have  already  alluded,  is  nowhere  more  clearly  shown  than 
in  reference  to  the  organization  of  credit.  Mun,  Culpep- 
per, Child,  Temple,  all  drew  comparisons  between  Hol- 
land and  England,  and  never  tired  of  pointing  out  the 
advantages  which  Holland  derived  from  the  supply  of 
capital  and  the  organized  loan  system  afforded  by  its 
Bank.  A  low  rate  of  interest,  such  as  prevailed  in  Hol- 
land, was  the  causa  causans  of  all  commercial  prosperity 
and  of  all  economic  development;  until  England  has 
secured  this,  she  can  not  hope  to  compete  successfully 
with  the  Dutch.  Child  triumphantly  records  that  the 
East  India  Company  was  able,  in  1681 ,  to  borrow  £600,000 
at  3  per  cent,  and  can  not  refrain  from  adding  that  this 
would  be  a  most  unwelcome  piece  of  news  for  the  Dutch. 

<i  Roscher,  "  Colonien,  etc.,"  p.  254. 


48 


The     English     Banking     System 

The  acquisition  of  large  colonial  possessions,  which 
always  means  a  demand  for  capital;  the  resulting  oversea 
commerce,  the  concentration,  due  to  the  Navigation  Act, 
of  the  entire  carrying  trade  to  and  from  England  and  its 
colonies  in  English  hands,  must  necessarily  have  given  a 
great  stimulus  during  the  second  half  of  the  century  to 
this  demand  for  an  organized  loan  system  and  for  a  safe 
and  cheap  method  of  borrowing.  England's  ability,  not 
merely  to  acquire  colonies,  but  to  make  them  prosperous; 
the  fact  that  she  was  in  a  position  to  undertake  the  trade 
in  her  own  products  and  those  of  her  colonies  in  spite  of 
the  decreased  use  of  foreign,  and  especially  of  Dutch  ships;" 
the  steady  decline  in  the  rate  of  interest;  all  show  that 
her  control  of  capital  was,  even  at  that  time,  considerable. 
But  the  existing  institutions  were  quite  inadequate  to 
secure  a  convenient  interchange  between  the  possessors 
of  capital  and  the  seekers  of  credit.  The  increasing  num- 
ber of  projects  and  schemes  for  the  erection  of  a  Bank, 
which  appeared  during  the  second  half  of  the  century, 
bear  witness  to  this. 

The  now  famous  goldsmiths  afforded  at  this  time, 
though  perhaps  not  before  this  time,  the  most  important 
source  of  credit.  Italian  merchants,  particularly  workers 
in  gold  and  silver,  had  settled  in  England  as  early  as  the 
reign  of  Richard  II,  i.  e.,  in  the  twelfth  century.  Since 
the  times  of  John  and  of  Henry  III,  these  merchants  had 
been  employed  to  collect  the  customs  duties  and  taxes  for 

«It  is  true,  indeed,  that  during  the  years  immediately  following  the 
passing  of  the  Navigation  Act  England  had  to  give  way  to  Holland  in  the 
trade  to  certain  countries  (Russia,  Greenland),  possibly  in  order  to  enjoy 
the  more  profitable  trade  with  the  colonies;  but  her  increased  navy  was 
soon  able  to  win  back  every  market.     (Cf.  Anderson,  a.  1660.) 

68299° — II 4  49 


N  at  i  0  71  a  I    Monetary     Commission 

the  Crown,  and  to  advance  money  to  the  latter.  After 
the  expulsion  of  the  Jews  in  1290  they  acquired  greater 
importance  in  this  connection. °  They  made  use  of  the 
advanced  commercial  methods  employed  in  their  own 
country,  for  it  is  said  that  even  in  the  fifteenth  century 
they  effected  their  payments  almost  entirely  by  bills  of 
exchange;  payments  in  coin  were  the  exception.^  Wliat 
share  they  took  in  early  times  in  general  monetary  trans- 
actions can  not  be  accurately  determined.  The  purchase, 
sale,  and  exchange  of  coins  had  been  from  ancient  times 
a  royal  prerogative.  A  special  office  existed  for  the  pur- 
pose, the  cambium  regis,  called  also  the  Exchange.  In 
Henry  VIII's  reign  this  office  ceased  to  be  filled  and  the 
goldsmiths  acquired  the  business  of  the  exchange. 
Whether  the  proclamation  issued  in  1627  by  Charles  I, 
prohibiting  the  goldsmiths  under  severe  penalties  from 
the  sale  and  purchase  of  money  and  reestablishing  the 
business  of  the  exchange  as  a  royal  prerogative,  was  ever 
enforced  it  is  impossible  to  determine."^  The  statement 
repeatedly  made  by  English  writers  that  the  goldsmiths 
were  not  generally  employed  as  bankers  by  merchants  or 
as  money  changers  until  Cromwell's  time  suggests  that  it 
was  enforced.     In  any  case  it  is  certain  that  private  per- 

o  Schanz,  "Englische  Handelspolitik,"  Leipzig,  1881,  vol.  i,  p.  551. 

&  Schanz,  i,  p.  557. 

c  Schanz,  i,  p.  522,  is  of  opinion  that  the  office  was  not  filled  after  1532. 
In  any  case  the  bill  business  should  be  distinguished  from  the  business  of 
money  changing.  Both  bore  the  name  of  "exchange."  The  bill  office  was 
permanently  abolished  in,  perhaps,  1532,  whilst  the  offices  for  exchanging 
money  were  revived.  Anderson  states  that  the  cambium  regis  was  recon- 
stituted in  1627  and  1628.  The  existence  of  the  cambium  regis,  also 
called  Exchange,  may  account  for  the  confusion  made  by  Marperger 
between  the  English  Exchequer  and  the  Royal  Exchange.  "  Beschreibung 
der  Banken,"  p.  288. 


50 


The     English     Banking     System 

sons  deposited  their  money  in  the  Royal  Mint  at  the 
Tower  as  late  as  1640.  But  after  Charles  I,  in  this  year, 
seized  the  whole  amount  (£200,000)  so  deposited,  and  ap- 
propriated it  as  a  loan  for  his  own  use,  the  scanty  confi- 
dence felt  in  this  unpatriotic  king  seems  to  have  vanished 
entirely."  It  is  at  any  rate  stated  that  from  this  time 
forward  the  merchants  deposited  their  money  with  the 
goldsmiths.  Other  monetary  transactions  may  easily 
have  followed  from  this.  "  In  the  reign  of  William  old 
men  were  still  living  who  could  remember  the  days  when 
there  was  not  a  single  banking  house  in  the  city  of  Lon- 
don."^ And  in  1672  the  business  of  the  bankers,  who 
made  payments  on  behalf  of  merchants,  is  referred  to  by 
a  contemporary  writer  as  something  new  and  strange.  ^ 

But  although  the  banking  business  may  have  been  still 
a  novelty  at  this  time  it  had  evidently  grown  considerably 
and  was  of  great  importance  in  credit  transactions.  In 
the  first  place  the  goldsmiths  received  money  on  deposit, 
probably  originally  only  from  merchants.  They  dis- 
counted the  merchants'  bills  and  lent  a  portion  of  the 
deposits  upon  security.     In  time  they  were  also  entrusted 

a  William  Temple  says  in  one  of  his  writings  that  the  Mint  "had  then 
the  credit  of  a  bank,  and  for  several  years  had  been  the  treasury  of  all  the 
vast  payments  transmitted  from  Spain  to  Flanders."  (See  Anderson,  a. 
1672.)  The  Exchequer  seems  also  to  have  been  used  as  a  depository.  In 
1666,  when  George  Downing  proposed  the  introduction  of  an  appropriation 
clause  which  would  have  given  Parliament  the  control  over  the  receipts 
and  issues  and  would  have  insured  the  proper  application  of  the  latter,  he 
justified  his  proposal  on  the  grounds  that  it  would  excite  a  feeling  of 
security  and  confidence  in  the  public.  He  would  "make  this  Exchequer 
the  best  and  the  greatest  bank  in  Europe,"  and  "all  nations  would  sooner 
send  their  money  into  the  Exchequer  than  into  Amsterdam  or  Genoa  or 
Venice." 

^  Macaulay,  "History  of  England,"  1889,  vol.  ii,  p.  479. 

c  Anderson,  a.  1672. 


51 


National     Monetary     Commission 

with  the  capital  of  private  persons.  They  received  the 
rents  of  landowners  which  were  sent  to  London,  they 
made  payments  for  their  customers,  and  when  they  found 
that  the  deposits  could  be  profitably  employed  they  paid 
interest  on  them.  The  merchants,  however,  who  deposited 
their  money  at  call  received  no  interest.  Hence  it  appears 
that  the  payment  of  interest  on  deposits  was  connected 
with  notice  of  withdrawal.**  The  banking  business 
developed  so  rapidly  in  a  short  time  that  even  in  the  sev- 
enth decade  we  find  goldsmiths'  notes,  payable  upon 
demand,  circulating  as  currency.  These  notes  were  issued 
up  to  large  amounts.  Thus  in  1666  one  goldsmith  had 
notes  for  £1,200,000  in  circulation.''  They  were  consid- 
ered so  safe  that,  on  account  of  their  more  convenient 
form,  people  preferred  them  to  coin.*" 

There  is  no  doubt  that  the  goldsmiths  by  forming  a 
center  for  loan  transactions  greatly  benefited  the  whole 
economic  system.  But  it  was  in  the  financial  embarrass- 
ments of  the  State  that  these  credit  facilities  proved  of  the 
greatest  service.  Sometimes  the  goldsmiths  made  loans 
direct  to  the  King;  sometimes  they  discounted  the  bills 
issued  by  him  and  by  the  Government.  They  employed 
the  greater  part  of  their  capital  in  this  way.  The  high 
interest  they  paid  to  their  creditors  was  based  on  the  rate 
which  they  charged  to  the  King.  Child  accuses  them  of 
keeping  up  the  rate  of  interest  artificially.     Since  they 

a  Anderson,  a.   1645,   1665,   1672. 

'>  Roscher,  "Zur Geschichte  der  englischen  Volkswirthschaftslchre," p.  144 
(from  "  A  Discourse  of  trade,  coyn,  and  paper  credit  and  of  ways  and  means 
to  gain  and  retain  riches,  London,  1697.  To  which  is  added  the  argument 
of  a  learned  counsel  upon  an  action  of  the  case  brought  by  the  East  India 
Company  against  Mr.  Sand,  an  interloper,  1696"). 

c  Law,  "Considerations  sur  le  commerce  et  sur  I'argent,"  1720,  p.  150. 


52 


The    English    Banking    System 

themselves  received  8  per  cent  they  paid  6  per  cent  at  a 
time  when  it  should  have  been  possible  to  borrow  at  4  per 
cent.*^  Experience  showed,  however,  that  the  rate  of 
interest  received  and  paid  by  the  goldsmiths  was  not  high 
enough  to  protect  them  and  their  customers  from  the 
disaster  which  resulted  from  these  loan  transactions  with 
the  State,  for  in  1672  Charles  II  stopped  all  payments  of 
capital  to  his  creditors  and  reduced  the  interest  from  8  to 
6  per  cent.^  Many  of  the  bankers,  who  were  now  pressed 
from  all  sides  with  demands  for  payment,  went  bankrupt, 
and  numerous  merchants  and  private  persons  connected 
with  them  suffered  severely.  No  fewer  than  10,000 
families  were  said  to  have  been  affected  by  this  misfortune. 
Public  credit  was  destroyed  for  a  long  time  to  come,  and  in 
addition  the  confidence  which  people  had  felt  in  the  gold- 
smiths was  severely  shaken.''  7* 

These  events,  combined  with  the  increased  need  for 
credit,  must  necessarily  have  revived  thfe  demand  for 
some  institution,  independent  of  the  royal  caprice,  which 
should  organize  payments  and  supply  loans. 

In  1657  a  project  for  the  establishment  of  a  Bank  was 
for  the  first  time  laid  before  Parliament  by  Samuel  Lamb. 
And  from  this  time  until  the  foundation  of  the  Bank  of 
England  various  projects  were  discussed — some  in  pam- 

0  Anderson,  a.  1672. 

ö  [No  interest  was  oflFered  till  1677,  when  6  per  cent  was  promised  and  paid 
until  1683.     H.  S.  F.] 

c  Burnet  relates  an  incident  in  connection  with  this  "shutting  up  of  the 
Exchequer"  which  shows  that  the  custom  of  depositing  money  with  the 
goldsmiths  was  usual  even  with  those  who  were  not  merchants.  The  Earl 
of  Shaftesbury,  who  had  advised  the  King  to  take  the  step,  had  taken  "all 
his  own  money  out  of  the  bankers'  hands,  and  warned  some  of  his  friends 
to  do  the  like"  (History  of  his  Own  Time,  London,  1724,  I,  p.  306). 


53 


National    Monetary     Commission 

phlets,  some  in  memorials  to  Parliament;  as,  for  instance, 
those  of  William  Potter,  Henry  Robinson.Hugh  Chamber- 
lain, and  others.  A  Bank  was  to  be  established  which 
should  issue  notes  against  the  deposit  of  securities.  The 
projects  differed  more  or  less  according  to  whether  real 
property  or  movables  were  to  be  taken  as  security  and 
whether  forced  or  voluntary  circulation  was  proposed  for 
the  notes.  None  of  these  projects  was  accepted.  But  it 
must  not  be  thought  that  this  was  owing  to  a  recognition 
of  their  worthlessness.  Many  of  the  pamphlets  received 
high  praise.  The  real  cause  was  the  fear  lest  the  King 
should  raise  a  Bank  to  satisfy  his  financial  needs  without 
the  consent  of  Parliament.  In  the  struggle  with  the 
Stuarts  the  financial  weakness  of  the  King  and  liis  de- 
pendence on  parHamentary  grants  formed  one  of  the  most 
powerful  safeguards  of  the  hberties  of  the  people. 

The  opinion,  widespread  on  the  Continent  even  at  a 
later  time,  that  a  Bank  was  incompatible  with  a  mon- 
archy, «  had  grown  to  a  veritable  conviction  in  Hngland, 
owing  to  special  circumstances.  In  Hngland  the  founda- 
tion of  a  Bank  came  to  be  a  pohtical  instead  of  an  economic 
question.  It  was  not  founded  for  the  benefit  of  English 
economic  organization,  which  had  long  needed  some  such 

o-  For  this  opinion,  held  by  nearly  all  the  authors  who  wrote  about  Banks 
in  the  seventeenth  and  eighteenth  centuries,  see  Poschinger,  "  Die  Bauken 
im  deutschen  Reich,  etc.,"  Vol.  I,  p.  4,  Vol.  II,  pp.  6,  25;  "  Bankwesen  und 
Bankpolitik  in  Preussen,"  Vol.  I,  p.  30;  Schröder,  "Fürstliche  Schatz-  und 
Rentkammer"  (ed.  1752),  p.  234;  Marperger,  loc  cii.,  p.  107 ;  "  Geschichtliche 
Darstellung  der  Banken,"  Hamburg,  1800,  p.  3.  May  alone  ("  Einleitung  in 
die  Handlungswissenschaft,"  1763,  p.  261)  regards  this  fear  as  needless  and 
supports  his  position  by  reference  to  the  Bank  of  England,  in  doing  which 
it  must  be  acknowledged  that  he  overlooked  the  difference  between  the 
English  and  the  continental  monarchies. 


54 


The     English     Banking    System 

great  institution  for  the  supply  of  credit  facilities."^  No 
steps  were  taken  to  establish  a  Bank  under  Charles  II  or 
under  James  II,  the  last  two  kings  of  the  house  of  Stuart. 
The  complaints  of  merchants  with  regard  to  the  long- 
desired  Bank  obtained  no  hearing  until  the  "glorious 
Revolution"  had  taken  place,  and  William  III,  a  strong 
king,  but  one  who  enjoyed  the  confidence  of  the  people, 
had  come  to  the  throne;  until  the  liberties  of  the  people 
and  the  privileges  of  Parliament  had  beeji  confirmed  by 
the  Bill  of  Rights,  and  the  Government  of  England  been 
transformed  from  an  attempt  at  absolutism  to  a  parlia- 
mentary system.  The  requirements  of  public  credit  gave 
the  essential  inducement  needed  to  prepare  Parliament 
to  accept  at  length  one  of  the  many  projects,  and  the 
Bank  was  destined  by  the  very  circumstances  of  its  founda- 
tion to  satisfy  these  requirements. 

II.  PUBLIC  CREDIT  BEFORE  THE  FOUNDATION  OF  THE  BANK, 

English  writers  on  finance  are  generally  wont  to  refer 
the  origin  of  the  existing  English  public  debt  to  the  foun- 
dation of  the  Bank  of  England.  They  are  so  far  justified 
in  that  the  debt  incurred  by  the  Government  to  the  Bank 
at  its  foundation  was  never  repaid,  and  formed  a  basis  to 
which  during  the  eighteenth  century  enormous  additional 
debts  were  added,  the  burden  whereof  still  rests  on  the 
English  nation,  while  no  previous  debt  has  any  direct 
connection    with    the    existing    national    debt.     English 

ß  To  the  great  joy  of  the  Dutch,  Burnet  remarks,  "  I  had  heard  the  Dutch 
often  reckon  up  the  great  advantages  they  had  from  their  Banks;  and  they 
concluded  that  as  long  as  England  continued  jealous  of  the  Government 
a  Bank  could  never  be  settled  among  us  nor  gain  credit  enough  to  support 
itself,  and  upon  that  they  judged  that  the  superiority  in  trade  must  still 
lie  on  their  side."     ("History  of  his  Own  Time,"  Vol.  II,  p.  124.) 

55 


National    Monetary     Commission 

writers,  however,  do  not  always  adopt  this  point  of  view. 
They  tend  more  frequently  to  represent  the  concept  of  a 
national  debt  as  first  appearing  in  connection  with  the 
foundation  of  the  Bank.  The  term  national  debt  in  its 
wider  sense  includes  all  forms  of  government  debt,  but  it 
frequently  implies  not  so  much  that  the  creditor's  security 
is  legally  based  upon  public  credit  as  that  the  debt  is  such 
that  no  provision  is  made  for  its  redemption,  and  that 
consequently  it  forms  a  permanent  burden  upon  the 
national  income.«  In  this  latter  sense,  the  government 
debt  to  the  Bank  is  regarded  as  the  first  embodiment  of 
a  new  principle  of  borrowing,''  and  the  history  of  the 
English  national  debt  is,  as  a  rule,  traced  back  no  further. 
This  principle  did  not,  however,  come  into  being  with  the 
Bank  of  England.  It  may  rather  be  said  to  have  origi- 
nated with  the  Banker's  Debt  of  Charles  II,  for  this  King, 
as  we  have  already  mentioned,  ceased  payment  of  the 
capital  debt  in  1672  and  undertook  to  pay  interest  only 
thenceforward.  But  even  apart  from  this  fact,  we  should 
have  to  preface  our  history  of  the  Bank's  connection  with 
the  national  debt  by  a  description  of  public  credit  before 
its  foundation.  The  forms  of  debt  belonging  to  the  earlier 
period  continue  in  the  later  one  and  are  of  the  utmost 

a  Thus  Postlethwayt,  "The  Universal  Dictionary  of  Trade  and  Com- 
merce," London,  1766,  article  "  National  Debt,"  writes  of  "that  weak  and 
shameful  maxim,  that  it  is  better  for  the  public  creditors  to  continue 
perpetual  annuitants  only." 

ö  "Thus  the  beginning  of  paper  money  and  '  a  Bank  '  was  the  beginning 
of  national  debt,  properly  so  called.  There  were  before  this  time  arrears 
owing  by  Government  and  also  some  sums  taken  up  on  terminable  annui- 
ties for  lives;  but  this  (the  government  debt  to  the  Bank)  is  the  first  sum 
standing  on  the  debit  side  of  the  national  account  for  the  redemption  of 
which  no  provision  was  made  or  attempted  to  be  made  and  of  which  the 
interest  only  was  provided  for."  (Doubleday,  "A  Financial  History  of 
England,"  London,  1847,  p.  73.) 

56 


The     English     Banking     System 

importance  with  regard  to  the  influence  acquired  by  the 
Bank  over  pubhc  credit. 

Just  before  the  foundation  of  the  Bank  a  revolution  had 
been  made  in  the  entire  system  of  pubhc  credit  owing  to 
the  essential  differences  which  distinguished  the  consti- 
tution and  administration  of  William  Ill's  government 
from  that  of  the  Stuart  kings.  After  the  accession  of 
William  III  a  constitutional  system  of  public  finance 
developed  in  England,  whose  legal  basis  was  the  Decla- 
ration of  Rights.  Before  the  "glorious  Revolution,"  on 
the  other  hand,  a  continuous  struggle  had  been  carried  on 
with  varying  success  between  King  and  Parliament  with 
respect  to  the  extent  of  their  respective  powers.  The 
Crown,  however,  maintained  its  supremacy.  The  conduct 
of  the  entire  administration  and  the  determination  of  the 
expenditure  on  the  various  public  services  were  royal 
prerogatives.  Parliament  had  hitherto  encroached  upon 
this  prerogrative  only  in  isolated  cases  and  in  dealing  with 
weak  monarchs.  To  defray  his  personal  expenditure  and 
the  cost  of  the  administration  directed  by  him,  the  King 
had  the  hereditary  revenue  and  the  supplies  voted  him 
annually  by  Parliament.  Parliament  had  no  control  over 
the  system  of  borrowing,  with  the  exception  again  of 
transitory  interferences.  Debts  were  incurred  either  by 
the  King  or  by  one  of  the  separate  departments  of  the 
administration.  The  King's  debts  must  be  reckoned  as 
public  debts  so  long  as  no  distinction  existed  between  his 
personal  income  and  the  public  revenue;  but  they  ceased 
to  be  part  of  the  public  debt  so  soon  as  this  distinction  was 
made.     The  debts  incurred  by  the  public  departments  had, 


57 


National     Monetary     Com  m  i  s  s  io  n 

as  a  matter  of  course,  a  public  and  equitable  character    || 
which  they  have  always  retained. 

Loans  to  the  Crown  were  in  the  seventeenth  century 
usually  raised  on  the  security  of  privy  seals  or  letters 
patent. 

Privy  seals  or  letters  patent  were  either  vouchers  drawn 
up  for  a  particular  occasion,  or  they  were  distributed  in 
great  numbers  throughout  the  country,  being  sent  to 
prominent  persons  who  thereupon  advanced  money  to  the 
King.  They  were  drawn  up  in  the  usual  clumsy  form 
and  embodied  the  King's  pledge  to  repay  the  sum  stated  in 
the  rescript  at  a  given  date,  for  which  he  engaged  his 
"word  never  yet  broken  to  any,"  and  bound  himself,  his 
heirs,  and  his  successors.  A  space  where  the  sum  lent  was 
to  be  inserted  remained  blank,  and  was  filled  in  by  the 
lender.  On  payment  of  the  sum  to  the  collector  appointed 
by  the  King  the  said  collector  acknowledged  the  receipt 
on  the  rescript  and  the  document  thus  acquired  legal  force. 
It  was  not  made  out  to  order,  and  hence  was  negotiable. 
After  the  date  on  which  it  fell  due  it  could  be  presented  at 
the  Exchequer  where  it  served  as  a  warrant  for  payment  in 
accordance  with  a  clause  inscribed  on  it."  No  interest 
was  promised,  nor  was  there  any  mention  of  a  fund  out  of 
which  the  debt  could  be  paid.  The  raising  of  loans  on 
security  of  letters  patent  dates  from  the  thirteenth 
century.  ^     Letters  patent  were  also  used  in  recognition  of 

oA  privy  seal  of  this  nature  issued  by  James  I  on  July  31,  1604,  is 
printed  in  the  Return  on  Public  Income  and  Expenditure,  P.  P.  1869, 
366  II,  p.  509. 

&  Return  on  National  Debt,  P.  P.  1858,  No.  443,  p.  87,  quotes  from  an 
issue  roll  of  the  Exchequer  of  the  year  20  Edw.  I  (1292). 


58 


The     English     Banking    System 

an  already  existing  debt.  Thus  in  1672  Charles  II  by 
letters  patent  acknowledged  the  interest  owed  by  him  to 
the  deceived  bankers.« 

The  debts  of  the  public  departments  were  incurred 
either  through  anticipation  of  the  receipts  of  the  revenue 
or  through  arrears  of  payment.  A  loan  was  raised  by 
assignments  on  anticipated  receipts  from  the  taxes,  or 
payment  was  actually  made  with  such  an  assignment,  or 
arrears  of  payment  were  recognized,  for  which  there  was 
legal  liablity  in  case  the  claim  was  not  satisfied. 

Loans  in  anticipation  of  revenue  can  be  traced  far  back 
in  English  history.  Madox  mentions  them  as  used  in  the 
time  of  Henry  III  (1242)  in  the  same  form  as  that  custom- 
ary in  the  seventeenth  century.  Pieces  of  wood  called 
tallies  were  issued,  which,  to  distinguish  them  from  the 
tallies  of  sol  used  as  receipts  in  the  course  of  the  adminis- 
tration of  public  money  by  the  Exchequer,  were  called  tallies 
of  pro.  The  tallies  of  pro  were  at  first  used  only  in  the  proc- 
ess of  payment.  They  were  instruments  of  payment  which 
were  issued  to  the  sheriffs  and  receivers  of  the  Exchequer 
as  a  charge  on  them  to  pay  the  sum  inscribed  theredn  out 
of  the  revenue  in  their  hands.  When  the  accounts  of  the 
revenue  were  presented  to  the  Exchequer  the  sums  repre- 
sented by  these  tallies  of  pro  were  assigned  to  the  receivers 
in  question.  The  name  was  derived  from  the  word  "  pro  " 
cut  on  the  tally,  together  with  the  name  of  the  person  for 

o  Since  letters  patent  under  the  Royal  Sign  Manual  contained  the  sov- 
ereign's pledge  of  payment,  an  action  could  be  brought  if  payment  were  not 
forthcoming.  The  celebrated  Bankers  Case  before  the  court  of  exchequer 
under  William  III  (Howell,  State  Trials,  London,  1812,  vol.  14)  was  based  on 
such  an  action.  Judgment  was  obtained  against  the  Crown.  Lord  Somers, 
the  chancellor,  set  aside  the  decision,  which  was,  however,  finally  upheld 
by  the  House  of  Lords  on  appeal. 

59 


National     Monetary     Commission 

whom  it  was  issued  and  to  whom  it  was  to  be  paid.  These 
tallies  of  pro  were  also  used  in  the  anticipation  of  taxes. 
Anyone  who  advanced  money  on  the  security  of  the  taxes 
to  be  anticipated  was  given  a  tally  on  which  was  notched 
his  name,  the  amount  advanced,  i.  e.,  the  sum  to  be 
repaid,  and  the  head  of  the  revenue  on  which  the  payment 
was  charged.  From  this  use  they  received  the  additional 
name  of  tallies  of  anticipation.  They  were  also  called 
tallies  of  assignment,  since  in  times  when  money  was  very 
scarce  they  were  used  instead  of  actual  payments." 

Until  the  reign  of  Charles  II  these  tallies  of  anticipation 
do  not  appear  to  have  borne  interest,  and  they  were  not 
negotiable.  By  12  Charles  II,  c.  9  (1660),  they  secured 
the  first  advantage,  and  17  Charles  II,  c.  i.,  made  them 
negotiable  instruments. 

By  this  latter  statute  an  order  of  repayment,  signed  by 
the  lord  treasurer,  was  assigned  to  all  who  should  advance 
money  to  the  King,  in  addition  to  the  tally  acknowledging 
the  payment  of  the  loan.  This  order  of  repayment  bore 
the  same  date  as  the  tally,  and  contained,  besides  the 
order  to  repay  the  capital,  an  order  to  pay  interest  (6  per 
cent)  and  6  per  cent  additional  interest  in  case  the  payment 
were  delayed.  A  register  was  kept  of  all  loans  made  on 
such  guaranties.  The  claims  arising  out  of  the  tallies 
and  the  orders  of  repayment  could  be  transferred  by 
indorsement  on  the  order.  All  such  transfers  must  be 
notified  to  the  Exchequer  for  entry  in  the  register. 

o  Madox,  "The  History  of  the  Exchequer,"  London,  1769  (2d  ed.).  This 
description  is  taken  from  Return  on  National  Debt,  1858,  443,  p.  88,  and 
Return  on  Public  Income  and  Expenditure,  1869,  336,  I,  p.  340,  where 
also  is  given  a  drawing  of  a  tally  and  its  inscription. 


60 


The     English     Banking     System 

The  tallies  of  anticipation  were  not  always  issued  against 
specified  heads  of  revenue.  As  the  financial  administra- 
tion fell  more  and  more  into  the  hands  of  Parliament,  the 
methods  of  borrowing  became  freer.  In  time  acts  of 
Parliament  made  it  legal  for  the  Treasury  to  issue  talHes 
as  soon  as  the  taxes  were  imposed,  in  order  to  obtain  the 
money  more  rapidly.  It  was  sometimes  arranged  that 
these  tallies  should  be  repaid  out  of  the  supplies  voted 
and  that  the  latter  should  be  ear-marked  for  the  purpose ; 
sometimes  the  act  only  gave  a  general  authorization  for 
the  anticipation.  The  latter  form  of  loan  on  security  of 
the  pubHc  credit  in  general  was  continued  into  a  later 
period.« 

As  soon  as  the  talhes  fell  due  they  were  presented  for 
payment  by  the  last  holder,  either  at  the  Exchequer  or 
to  the  revenue  department  on  whose  funds  they  were 
charged.  If  the  holder  did  not  present  himself  it  appears 
that  a  public  announcement  was  made  that  payment  was 
due.'' 

With  regard  to  arrears  of  payment  the  Government 
either  left  them  until  they  could  be  paid  out  of  the  receipts 
of  the  revenue  and  the  parliamentary  grants,  or  they  were 
met  by  tallies  of  anticipation  in  lieu  of  payment,  or 
finally,  a  formal  acknowledgment  of  debt  might  take 
the  place  of  the  delayed  payment.  In  the  latter  case 
the  one  debt  was  replaced  by  another  of  like  amount  but 

oThus  in  9  Will.  IV,  c.  44,  11  Will.  Ill,  c.  2,  12  and  13  Will.  Ill,  c.  11, 
I  Anne,  c.  12. 

b  Cf.  a  notice  in  the  London  Gazette,  October  8-12,  1696,  that  three  tallies 
of  pro  in  the  names  of  George  Toilet,  Richard  Uphill,  and  Sir  Stephen 
Evance,  levied  on  the  Hereditary  and  Temporary  excise  "are  ready  to  be 
paid"  if  presented  to  the  cashier  general  at  the  Excise  Office. 


61 


National    Monetary     Commission 

possessing  certain  advantages  for  the  creditor.  Such 
forms  of  debt  developed  in  connection  with  the  navy,  the 
army,  and  the  ordnance  departments  and  were  the  origin 
of  the  navy  bills  and  of  the  debentures.  Unfortunately 
the  nature  of  these  bills  in  early  times  cannot  be  exactly 
determined.  The  following  account  may,  however,  be 
regarded  as  substantially  accurate: 

The  navy  bills  were  issued  by  the  commissioners  of 
the  navy  office  in  payment  for  stores  and  provisions  pur- 
chased. They  were  vouchers  resembUng  bills  of  ex- 
change, which  fell  due  after  a  certain  interval,  and  bore 
interest,  which  interest  was  added  to  the  amount  of  the 
bill  when  it  was  made  out.  They  are  first  mentioned  in 
1693  when  £1,430,439  was  outstanding  in  such  bills. 
The  victualing  and  transport  bills  were  similar  forms  of 
recognition  of  delayed  payments.  They,  too,  were  ne- 
gotiable and  were  issued  by  the  victualing  office,  a 
department  of  the  Admiralty,  and  by  the  transport  office." 

Debentures  are  referred  to  in  various  parliamentary 
papers  as  being  of  very  ancient  origin.^  But  so  many 
kinds  of  transactions  are  referred  to  under  this  name  that 
it  is  difficult  to  determine  their  exact  nature  as  a  method 
of  borrowing.     In  the  first  place  we  must  distinguish  the 

a  William  Fairman,  "An  Account  of  the  Public  Funds,"  London,  1824, 
p.  151,  gives  a  history  of  the  navy  and  victualing  hills  from  1749  onward. 
It  appears  however  from  the  parliamentary  reports  of  an  earlier  date,  in 
particular,  the  report  of  the  Commissioners  of  Public  Accounts,  171 1,  and 
from  a  pamphlet  ascribed  to  Robert  W'alpole  (The  Debt  of  the  Nation, 
stated  and  considered  in  four  papers,  I.  "A  letter  to  a  friend  concerning 
the  Public  Debt,  particularly  that  of  the  Navy."  1712,  in  Lord  Somer's 
"  Tracts, "  Vol.  XIII)  that  the  character  of  the  bills  had  not  altered  since 
the  beginning  of  the  eighteenth  century. 

''Return  on  National  Debt,  1858,  443,  p.  87,  Report  on  Exchequer, 
1 83 1,  313,  p.  94  (on  p.  119  a  reprint  of  a  debenture  is  given). 


62 


The     English     Banking     S  y  s  tern 

assignments  of  the  auditors  of  the  receipt,  officials  of  the 
Exchequer,  which  assignments  are  referred  to  as  deben- 
tures, and  to  which  I  shall  return  later.  Neither  are  we 
here  concerned  with  the  certificates  which  the  customs- 
house  collectors  gave  to  exporters  of  goods  who  were 
entitled  to  a  drawback,  and  by  reason  of  which  certificates 
the  drawback  was  duly  paid  at  the  proper  office. '^  Deben- 
tures in  different  forms  appear  also  as  floating  debt.  Thus 
31  Chas.  II,  c.  I,  provides  that  the  commissioners  for 
disbanding  the  forces  should  discharge  the  payments  still 
outstanding  by  means  of  certificates  or  debentures. 
These  are  to  be  issued  under  their  hands  and  seals  and 
addressed  to  the  lords  commissioners  of  the  Treasury,  who 
shall  thereupon,  without  other  warrant  of  the  King,  issue 
an  order  for  the  payment  of  the  sum  so  certified  together 
with  interest  at  8  per  cent  from  the  date  of  the  order. 
These  orders  for  payment  were  assignable  by  indorsement. 
In  many  cases,  however,  the  Treasury  was  empowered  to 
issue  debentures,  which  are  described  as  vouchers  signed 
by  at  least  three  of  the  lords  commissioners,  and  bearing 
interest  from  the  day  of  issue;  they  were  classified  and 
paid  on  notice  being  given  in  the  London  Gazette.  Finally 
another  form  of  debenture  was  customary  in  the  ordnance 
office;  this  was  taken  up  in  the  ordinary  process  of  pay- 
ment and  two  sorts  were  distinguished:  ready  money 
debentures  and  debentures  in  course.^ 

The  former  were  merely  orders  from  the  public  depart- 
ment on  the  pay  office,  which  orders  were  cashed  as  soon 
as  presented,  the  latter  were  classified,  and  whenever  the 

a  Postlethwayt,  loc.  cit.     Art.  "Debentures." 

^  Similar  forms  for  debentures  are  authorized  by  later  acts,  e.  g.,  i  Anne, 
c.  107,  s.  XXX  el  seq. 

63 


National     Monetary     Commission 

supply  of  cash  allowed  it — regularly  every  three  months 
toward  the  end  of  the  eighteenth  century — were  called 
in  for  payment,  when  the  person  entitled  to  the  money 
was  allowed  interest  at  an  agreed  rate."  || 

The  arrears  in  the  army  and  ordnance  departments  in 
both  the  seventeenth  and  eighteenth  centuries  always 
appear  in  the  public  accounts  under  the  titles  of  anny 
and  ordnance  debentures.  Whether  the  form  of  ordnance 
debenture  used  at  the  end  of  the  eighteenth  century  is 
the  same  as  that  employed  during  the  earlier  period  it 
is  impossible  to  determine.  It  is  doubtful,  even  con- 
sidering the  great  stability  of  all  forms  of  commercial 
currency  in  England;  but  the  debentures  of  all  dates 
must  have  had  one  common  characteristic  since  they  all 
embodied  the  recognition  of  a  deferred  payment  on  the 
part  of  the  ordnance  office.  In  this  respect  they  resemble 
the  army  debentures,  whilt-  the  Tnasury  debentures 
must  be  regarded  as  a  unique  form  of  floating  debt.  The 
latter  are  only  mentioned  here  in  order  to  demonstrate 
further  the  ambiguity  of  the  word  debenture;  so  far  as 
our  researches  have  extended  no  histance  of  their  use  in  the 
seventeenth  century  has  yet  been  authenticated.*  It  has 
already  been  pointed  out  in  another  connection  how 
important  a  share  the  bankers  took  in  the  system  of  public 
loans.  By  their,  means  the  above-mentioned  bills  were 
put  into  circulation.     Under  Charles  II  the  employment 

,  «  1 2th  Rcjiort  of  the  Commissioners  on  Public  .\ccounts,  1780,  and  21st 
Rejxjrt  of  the  Commissioners  on  Public  .\ccounts,  1797. 

&  These  debentures  issued  by  the  Treasury,  also  called  loan  dcljentures. 
were  first  issued  in  1731,  under  the  authority  of  5  George  II,  c.  2.  They 
were  rare  in  England,  more  frequent  in  Ireland,  and  continued  to  W 
used  even  in  the  nineteenth  century.  Fairman,  loc.  cit..  jv  147;  Return 
Public  Income,  II,  p.  542. 

64 


The     English     Banking     System 

of  bankers  as  intermediaries  took  the  place  of  the  direct 
transactions  with  the  pubhc  which  had  been  usual  earlier. 
They  were  soon  so  useful  to  the  King's  Ministers  that  the 
latter  declared  "that  they  were  so  necessary  to  the  King's 
affairs  that  they  knew  not  how  to  have  conducted  them 
without  that  assistance."  <^  As  soon  as  the  subsidies 
were  voted  by  Parliament,  the  King  summoned  the 
bankers  and  consulted  with  them  in  person  concerning 
the  sums  which  they  were  willing  to  advance  on  the 
security  of  the  revenue.  If  the  King  came  to  an  agree- 
ment with  them,  and  if  the  interest  and  the  date  of  repay- 
ment were  agreed  upon,  then,  upon  payment  of  the  sum, 
they  received  either  public  or  royal  securities,  i.  e.,  either 
tallies  with  orders  of  repayment,  or  privy  seals.  The 
interest  which  the  King  had  to  pay  was  usually  2  to  4 
per  cent  higher  than  that  paid  by  the  bankers  themselves. 
So  long  as  the  Treasury  punctually  fulfilled  its  obligations 
the  bankers  were  always  ready  to  make  advances,  and 
Clarendon  considers  that  the  loans  were  perhaps  obtained 
too  easily,  so  that  there  was  too  strong  a  temptation  to 
borrow  rather  than  to  save.  After  1672  the  bankers 
drew  back,  rendered  mistrustful  owing  to  the  reckless 
violation  of  their  rights  by  Charles  II,  and  the  King  and 
his  Ministers  were  obliged  once  more  to  trust  to  such 
confidence  as  they  might  enjoy  with  the  general  public, 
and  especially  with  the  rich  London  citizens. 

The  military  enterprises  of  William  III  soon  required 
more  supplies  than  the  Government  could  secure  from  the 
proceeds  of  the  revenue  and  taxes  and  by  using  the  uncer- 

a  Clarendon,  "Life,"  Vol.  II,  p.  218. 
68299°— II 5  65 


National     Monetary     Commission 

tain  and  decayed  credit  of  its  bills.  Attention  was  turned 
to  new  methods  of  borrowing,  which  promised  great  results, 
thanks  to  favorable  circumstances  and  to  the  fact  that 
henceforth  the  consent  of  Parliament  was  necessary  before 
a  loan  could  be  raised,  and  that  consequently  the  security 
of  the  creditors  was  increased. 

In  1689  a  loan  in  the  form  of  a  tontine  was,  for  the  first 
time,  raised  in  PVancc,  and  it  is  probable  that  this  form 
found  its  way  thence  to  England,  for  in  1693  a  project  for 
a  similar  loan  was  adopted  in  this  country.  A  million 
was  to  be  subscribed  for  the  purchase  of  shares  at  £100. 
Each  subscriber  was  to  receive  £10  a  year  for  seven  years, 
and  afterwards  7  per  cent  for  life.  The  survivors  were  to 
succeed  to  the  rights  of  any  subscribers  who  died  until 
the  total  number  of  claimants  was  reduced  to  seven. 
About  £900,000  were  subscribed  on  these  terms,  the 
remainder  was  borrowed  on  promise  of  14  per  cent  interest 
for  a  life.'* 

In  the  following  year  recourse  to  a  loan  was  again  neces- 
sary, and  once  more  an  annuity  was  the  form  chosen;  but 
this  time  in  connection  with  a  lottery.*'  There  was  to  be 
the  usual  purchase  of  an  annuity  for  sixteen  years,  but  as 
an  incentive  the  chance  was  thrown  in  of  winning  an  ex- 
ceptional sum  by  a  lottery.  The  annuity  was  not  high. 
It  amounted  to  10  per  cent,  or  £1  on  every  £10,  at  which 
price  the  tickets  were  issued.  Out  of  the  100,000  tickets 
2,500  were  raffled  for;  these  were  fortunate  tickets 
and  entitled  their  owners  to  extra  annuities,  the  high- 

a  The  rules  for  the  tontine  loan  were  determined  by  4  Will.  &  Mary,  c.  3. 
Those  for  the  annuity  connected  with  the  remainder  by  5  Will.  &  Marj',  c.  5 
^5  Will.  &  Mar>',  c.  7. 


66 


The     English     Banking     S  y  stem 

est  of  which  amounted  to  £i,ooo,  while  the  lowest  was 
only  £io." 

There  was  an  important  difference  between  the  tallies, 
bills,  and  debentures,  and  the  form  of  loan  last  mentioned, 
and  the  loans  of  1693  and  1694  mark  at  any  rate  an  ad- 
vance in  the  technique  of  borrowing.  The  superiority  of 
these  loans  lay  above  all  in  the  fact  that  Parliament  had 
undertaken  the  organization  of  the  system,  had  voted 
new  taxes  to  cover  the  liabilities  arising  out  of  the  loans, 
and  had  determined  the  conditions  upon  which  they  were 
to  be  raised.  From  this  time  forward  parliamentary  con- 
trol over  the  raising  of  loans  remained  unrestricted.  The 
privy  seals  now  became  valueless  as  far  as  the  public  debt 
was  concerned,  since  loans  could  not  be  raised  without  the 
consent  of  Parliament.  The  bills  and  debentures,  how- 
ever, remained  in  use,  since  they  merely  contained  an 
acknowledgement  of  a  debt  incurred  in  the  course  of  ad- 
ministration. Parliament  could  exercise  no  direct  control 
over  debts  of  this  kind,  nor  was  the  expenditure  of  the 
different  public  departments  controlled  in  detail  or  con- 
tinuously. It  was  consequently  possible  to  meet  expenses 
for  the  public  services  by  loans  raised  by  the  administra- 
tive departments,  and  the  more  so  since  the  deficit  was 
not  necessarily  due  to  expenditure  beyond  that  estimated 
in  the  receipts.  It  was  otherwise  with  the  tallies.  These 
were  orders  for  payment  out  of  future  revenue  and  con- 

«  The  technical  arrangements  for  the  lottery  were  as  follows :  One  hundred 
thousand  tickets,  numbered  in  the  order  of  their  issue,  were  placed  in  one 
box,  and  100,000,  of  which  half  were  blank  and  half  inscribed  with  the 
amount  of  the  prize,  were  placed  in  another  box;  the  tickets  were  drawn 
from  both  boxes  simultaneously,  so  that  those  numbers  which  were  drawn 
at  the  same  time  as  a  fortunate  ticket  entitled  the  holder  of  the  annuity 
certificate  bearing  the  same  number  to  the  prize.  '>^  ,* 

67 


National     Monetary     Commission 

stituted  an  express  claim  on  the  latter  even  before  it  had 
been  voted  by  Parliament.  Their  issue  was  likewise  regu- 
larly controlled  by  ParHament.  Permission  was  given, 
when  the  act  granting  the  taxes  was  passed,  to  issue  tallies 
for  the  amount  voted,  so  that  in  view  of  its  pressing  neces- 
sities the  treasury  might  obtain  the  money  at  once.  The 
consequence  often  was  that  the  taxes,  when  ultimately 
paid,  did  not  amount  to  the  sum  granted  and  hence  did 
not  cover  the  tallies  issued.  The  Treasury  could  only  issue 
tallies  on  its  own  authority  in  the  case  of  taxes  voted  for 
the  lifetime  of  the  King,  in  which  case  the  receipts  were 
entirely  at  the  disposal  of  the  Crown,  or  in  other  words,  of 
the  Treasury  as  empowered  by  the  Crown.  The  Govern- 
ment suffered  from  one  great  disadvantage  with  regard 
to  all  these  forms  of  floating  debt,  i.  e.,  it  was  powerless 
to  determine  the  conditions  of  the  loan.  Driven  to  issue 
the  loan  in  times  of  need,  it  must  accept  the  terms  offered 
by  the  public.  In  this  unfavorable  position  it  made  mat- 
ters worse  by  unpunctuality  in  repayment  and  by  con- 
tinual fresh  issues,  so  that  it  is  easy  to  understand  that  its 
bills  could  often  only  be  disposed  of  at  great  loss.  This 
had  happened  in  the  first  instance  with  regard  to  the  ton- 
tine and  lotter^"^  loans,  and  later  on,  at  the  foundation  of  the 
Bank  of  England. 

III.    THE  FOUNDATION   OF  THP:   BANK  OF   ENGLAND  AND  ITS 
STATUTORY    RELATION   TO   THE   STATE. 

The  projects  for  the  foundation  of  a  Bank  in  England 
which  were  brought  forward  during  the  Commonwealth 
and  the  reigns  of  the  two  last  Stuart  kings,  while  they 
look  upon  state  intervention  as  essential,  contain  no  sug- 


68 


The     English     Banking     System 

gestion  of  any  financial  connection  with  the  Government. 
The  projects  during  the  reign  of  WilUam  III,  on  the  con- 
trary, are  remarkable  in  that  they  all  contain  the  pro- 
posal that  the  capital  stock  of  the  Bank  should  constitute 
a  loan  to  the  State.  Thus  William  Paterson  in  1692,  in 
conjunction  with  several  merchants,  offered  to  advance  a 
million  to  the  Government  in  return  for  a  yearly  payment 
of  £65,000.  The  stock  certificates  of  the  debt  were  to 
have  forced  currency  or  to  be  legal  tender;  in  which  case 
Paterson  and  his  friends  undertook  to  keep  £200,000  in 
hand  for  the  regular  exchange  of  such  bills.  This  sum 
was,  however,  to  bear  interest  separately  at  5  per  cent.'* 
In  1694  Paterson  made  a  second  proposal.  Two  milhons 
were  to  be  advanced  to  the  Government  at  7  per  cent. 
The  subscribers  were  to  have  the  privileges  of  a  corpora- 
tion. They  were  to  provide  a  fund  of  £200,000  to  keep 
in  circulation  bills  to  the  amount  of  one  million,  which 
bills  were  to  bear  interest  at  8  per  cent.  This  proposal 
also  was  not  accepted,  but  a  third  project  brought  for- 
ward by  Paterson  in  the  same  year  was  finally  agreed  to 
by  the  Government  and  by  Parliament,  and  received  legal 
sanction  in  5  and  6  Will.  &  Mary,  c.  20. 

This  act  established  the  Bank  of  England.  It  fore- 
shadowed none  of  those  important  consequences  which 
were  afterwards  associated  with  the  Bank.  There  is  no 
reference  to  any  transference  to  the  Bank  of  the  manage- 
ment of  the  public  debt,  nor  of  the  administration  of  the 
public  money.  Even  the  note  circulation  of  the  Bank 
was   only    partially    regulated.     "The    scheme     *     *     * 

a  H.  Macleod,  "The  Theory  and  Practice  of  Banking,"  3d  ed.,  1875,  I, 
P-  377- 


69 


National    Monetary     Commission 

was  smuggled  under  the  long  tail  of  an  act  of  Parliament 
for  raising  moneys  generally"  (Doubleday) ;  and  there 
is  nothing  in  the  title  to  suggest  that  the  act  provides  for 
the  foundation  of  an  institution  for  the  supply  of  credit 
facilities  of  great  importance  in  public  finance." 

After  provision  has  been  made  for  the  levying  of  vari- 
ous duties  it  is  enacted  that  the  sum  of  £100,000  shall  be 
set  aside  yearly  from  the  proceeds  of  these  duties  for  the 
payment  of  any  persons  who  shall  advance  £1,200,000  to 
the  Government  before  August  i,  1694.  Their  Majesties 
are  empowered  to  constitute  the  subscribers  of  this  sum 
into  a  corporation  under  the  title  of  "The  Governor  and 
Company  of  the  Bank  of  England,"  and  to  grant  them  all 
privileges  as  such,  in  particular  the  right  to  own  property 
of  all  kinds,  including  land.  The  shares  of  the  subscribers 
(stocks)  are  transferable  in  such  manner  as  their  Majes- 
ties may  think  fit  to  determine.  No  one  may  subscribe 
more  than  £20,000,  a  quarter  to  be  paid  at  once  and  the 
remainder  before  January  i,  1695.  Should  the  final  pay- 
ment not  be  made  the  first  becomes  the  property  of  the 
Crown. 

The  corporation  may  deal  in  bills  of  exchange,  may 
buy  and  sell  gold  and  silver  bullion,  and  may  lend  money 
on  security  of  goods  and  merchandise  with  the  right  of 
selling  such  security  if  repayment  be  not  made  within 
three  months  after  the  time  agreed  upon.  It  may  sell 
other  goods  only  if  they  are  the  produce  of  land  belonging 

a  See  Appendix  I;  cf.  also  Leroy  Beaulieu,  who  says  of  the  foundation  of 
the  Bank:  "Aussi  ce  n'est  pas  ä  cause  d'une  n^cessite  tcor\om\i.\\ie  sentie 
et  comprise,  c'est  ä  titre  d'exp^dient  utile  ä  la  couronne,  que  fut  cr66  le 
plus  grand  et  le  plus  solide  Etablissement  de  credit  du  monde"  ("  Traits  de 
la  science  de  finances,"  Paris,  1877,  vol.  II,  p.  504). 


70 


The     English     Banking     System 

to  it.  Trade  in  any  kind  of  goods  or  merchandise,  not 
arising  out  of  the  above  transactions,  is  forbidden  under 
penalty  of  a  fine  of  three  times  the  value  of  the  goods. 
Money  may  only  be  borrowed  up  to  the  amount  advanced 
to  the  Government ;  for  any  sum  in  excess  of  this  the  per- 
sonal property  of  the  subscribers  is  liable.  All  notes  and 
bills  of  credit  issued  by  the  corporation  can  be  assigned 
by  one  person  to  any  other  who  shall  voluntarily  accept 
the  same  by  means  of  an  indorsement.  If  the  corpora- 
tion purchase  Crown  property  or  advance  money  to  the 
Crown  without  the  consent  of  Parliament,  it  is  liable  to  a 
penalty  of  three  times  the  sum  in  question.  The  repay- 
ment of  the  debt  may  be  made  after  August  i,  1695,  upon 
one  year's  notice,  and  the  privileges  of  the  corporation 
will  then  cease. 

From  the  last  clause  it  may  be  concluded  that  in  found- 
ing the  Bank  there  was  no  thought  of  creating  a  loan 
institution  of  permanent  utility.  Its  economic  value  was 
wholly  unappreciated,  since  its  existence  was  to  cease  a 
year  after  it  should  become  possible  to  cancel  the  govern- 
ment debt.  The  reservation  to  the  Government  of  such 
a  right  to  terminate  at  notice  was  not  unusual  where  cor- 
porations were  concerned.  It  was,  however,  not  usual 
to  make  use  of  it  unless  the  company  exceeded  its  privi- 
leges. It  was  only  a  threat  by  means  of  which  the  good 
behavior  of  the  corporation  might  be  secured." 

The  prerogative  of  erecting  corporations  belonged  to  the 
Crown.  The  King  exercised  this  prerogative  either  by 
giving  his  consent  to  an  act  of  Parliament  declaring  the 
formation  or  by  the  grant  of  a  charter  in  cases  where  the 

a  Burnet,  "History  of  his  Own  Time,"  Vol.  II,  p.  209, 
71 


National    Monetary     Commission 

act  of  Parliament  permitted  the  erection  of  a  corporation 
in  juturo.''  The  Bank  received  its  charter  on  July  27, 
1694.  No  privileges  were  conferred  upon  it  thereby  ex- 
cept  lihose  which  it  received  by  virtue  of  being  a  corpora- 
tion; the  conditions  regulating  the  election  of  officials,  the 
independence  of  the  corporation's  property,  the  ability  to 
sue  and  be  sued,  a  common  seal,  the  right  to  make  by- 
laws agreeable  to  the  general  laws  of  the  Kingdom.  ^ 

If  the  privileges  granted  to  the  Bank  by  act  of  Parlia- 
ment are  examined  it  will  be  found  that  they  relate  only 
to  the  credit  facilities  afforded  and  to  commercial  transac- 
tions. The  latter  are  limited  to  trade  in  the  produce  of 
the  corporation  lands,  and  in  gold  and  silver  bullion. 
The  loan  transactions  include :  DeaHng  in  bills  of  exchange, 
loans  on  pledges  deposited  (with  the  right  to  sell  such 
pledges  itself),  and  loans  on  mortgage.  The  borrowing 
transactions  were  not  specified.  It  might  receive  money 
on  any  terms  whatever,  so  long  as  its  liabilities  did  not 
exceed  the  amount  of  the  government  debt.  This  debt 
formed  its  capital  stock.  Should  the  Bank  wish  to  issue 
notes,  it  might  do  so  up  to  the  amount  of  the  debt.  Notes, 
bills  of  exchange,  and  other  debts  of  the  Bank  were  all 
looked  at  from  the  same  point  of  view.  They  were  the 
liabilities  of  the  company,  and  their  security  rested  upon 
the  government  debt. 

There  is  no  indication  of  any  intention  to  give  the  Bank 
a  share  in  the  management  of  the  public  debt  or  of  the 

a  Blackstone,  Commentaries  (edition  1830),  Vol.  I,  pp.  272,  472. 

^  See  an  extract  from  the  charter  of  the  Bank  of  England  in  McCulloch's 
"Treatise  on  Metallic  and  Paper  Money  and  Banks,"  p.  455.  Anderson, 
a.  1 694.  [There  is  a  reprint  of  the  charter  and  by-laws  in  Lawson's  "  History 
of  Banking."     H.  S.  F.] 


79 


The     English     Banking     System 

public  money.  To  say  that  by  the  provisions  of  the  act 
Vhich  founded  it  the  Bank  undertook  the  functions  of 
the  Exchequer,  is  untrue.  This  was  neither  embodied 
in  the  act  nor  was  it  immediately  put  into  practice.  The 
voluminous  act,  suffering  in  form  from  the  usual  clumsi- 
ness of  English  laws,  contained  in  fact  only  a  few  princi- 
ples of  administration  and  left  it  entirely  to  the  practical 
constructive  powers  of  the  Bank  directors  to  find  the 
necessary  rules  for  the  development  and  conduct  of  the 
Bank.  The  incomplete  nature  of  the  bank  act  certainly 
appears  as  an  advantage  when  constrasted  with  the 
detailed  provisions  for  organization  and  administration 
with  which  the  German  banks  of  the  eighteenth  century 
were  equipped  by  law.  It  very  soon  appeared  that  the 
Bank  could  be  managed  satisfactorily  without  such  pro- 
visions. It  carried  on  its  business  with  success  and  soon 
its  credit  with  the  general  public  was  higher  than  that  of 
the  goldsmiths  had  been.  It  lent  money  at  5  per  cent 
on  mortgages  and  on  real  security.  Foreign  bills  of 
exchange  were  discounted  at  4X  per  cent,  inland  bills  at 
6  per  cent.  The  Bank's  customers  could  obtain  discount 
on  the  former  at  3  per  cent,  and  on  the  latter  at  4^  per 
cent.  The  goldsmiths  had  charged  10  per  cent.  The 
bank  bills  were  payable  on  demand  and,  like  all  other 
credit  notes,  bore  an  interest  of  2d.  a  day  per  £100 — i.  e., 
rather  more  than  3  per  cent.  The  goldsmith's  notes  had 
carried  no  interest.'^ 

a  Michael  Godfrey,  "A  Short  History  of  the  Bank  of  England,"  London, 
1695  (reprintedinJohnFrancis's"History  of  theBankof  England,"  London, 
1848,  and  in  Lord  Somers's  Tracts,  Vol.  XI).  Godfrey  was  a  director  of 
the  Bank  in  1694. 


73 


National     Monetary     Commission 

But  the  Bank  was  of  most  importance  in  relation  to 
the  pubhc  credit.  It  cashed  the  government  bills.  Bills 
when  drawn  on  safe  funds  such  as  the  land  tax,  and  due  in 
three  or  four  months,  had  us.ually  been  at  a  discount  of 
2  per  cent,  which  discount  had  risen  to  30  per  cent  in  the 
case  of  other  funds,  and  when  the  interval  before  the  bills 
fell  due  was  greater.  But  now  the  Bank  raised  the  credit 
of  these  bills  so  high  that  they  were  soon  above  par,  and 
since  the  Government  paid  7  or  8  per  cent  on  them,  were 
more  sought  after  than  bills  of  exchange.  By  thus  cashing 
the  bills  representing  the  floating  debt  the  Bank  demon- 
strated at  once,  and  most  clearly,  its  usefulness  to  the 
Government.  This  usefulness  appeared  yet  more  clearly 
when  the  government  bills  declined  in  value  owing  to  the 
bad  state  of  the  ciu-rency,  and  the  Bank,  in  order  to 
restore  the  credit  of  the  bills,  proposed  an  increase  of  its 
capital,  as  subscriptions  to  which  the  bills  might  be  paid 
in  at  their  nominal  value. 

]  In  1697  a  new  bank  act  was  passed  (8  and  9,  Will.  & 
Mary,  c.  20)  allowing  the  Bank  to  increase  its  capital  stock 
in  the  way  mentioned.  The  subscriptions,  which  were 
not  limited  in  amount,  were  to  be  paid  one-fifth  in  bank 
notes  and  four-fifths  in  government  bills.  This  is  the 
first  consolidation  of  floating  debt  in  England.  The  Bank 
received  interest  at  8  per  cent  on  the  capital  thus 
obtained  and  was  allowed  to  increase  its  note  issue  up  to 
the  amount  of  the  new  subscriptions. 

The  provisions  of  the  act  of  1697  were  an  extension  of 
the  original  bank  act.  The  privileges  conferred  by  the 
latter  remained  unaltered,  whilst  a  new  and  important 


74 


The     English     Banking     System 

one  was  added.  It  was  enacted  that,  so  long  as  the 
Bank  continued,  no  other  bank,  corporation,  or  company 
of  the  nature  of  a  bank  should  be  allowed  by  act  of  Par- 
liament, It  was  this  act,  therefore,  which  first  gave 
the  Bank  an  exclusive  privilege,  a  privilege  limited  in 
time  indeed,  since  after  August  i,  1710,  the  Bank  might 
be  dissolved  under  conditions  similar  to  those  stated  in 
the  original  act;  but,  as  we  have  already  pointed  out,  no 
definite  significance  was  to  be  attached  to  such  a  warn- 
ing clause.  The  privileged  position  of  the  Bank  was  not 
yet,  however,  completely  secured,  since  the  undertaking 
that  no  other  bank  should  be  authorized  by  act  of  Parlia- 
ment did  not  prevent  the  transaction  of  banking  business 
by  companies  already  in  existence.  But  in  1708  the 
Government  was  again  in  need  of  money  and  had  recourse 
to  a  loan;  and  the  Bank  then  took  the  opportunity  to 
secure  a  full  monopoly  through  the  act  which  authorized 
this  loan.  This  third  act  (7  Anne,  c.  30)  authorized  the 
Bank  to  advance  £400,000  to  the  Government  and  re- 
duced the  interest  on  the  total  debt  to  6  per  cent.  At 
the  same  time  the  Bank  undertook  to  cash  the  exchequer 
bills,  a  species  of  government  note.  In  return  it  was 
enacted  that  during  its  continuance  no  company  consist- 
ing of  more  than  six  persons  should  issue  bills  or  note»_in 
England,  which  were  payable  on  dernand  or  within  six 
months  of  the  date  of  issue.  This  clause  was' intended  to 
secure  and  protect  the  exclusive  banking  rights  of  the 
Bank  of  England,  Although  in  fact  it  only  for  the  bene- 
fit of  the  Bank  of  England  forbade  the  issue  of  notes  by 
any  other  company  having  more  than  six  members,  it  was 
interpreted  by  contemporary  opinion  to  imply  that  the 


IS 


National    Monetary     Commission 

business  of  banking  in  general  might  not  be  carried  on  by 
such  companies.  As  is  well  known,  this  legal  error  was 
not  recognized  until   1835. 

These  three  acts  together  formed  the  basis  of  the  Bank 
of  England's  position  until  the  beginning  of  the  nineteenth 
century.  It  would  be  impossible  to  deduce  this  position 
from  the  original  act  alone,  but  it  is  not  necessary  to  take 
into  account  the  acts  passed  after  1708,  since  they  add 
nothing  essential.  The  provisions  set  forth  in  these 
original  laws  relate  only  to  the  economic  condition  of  the 
Bank. 

The  Government  had  conferred  upon  it  banking  rights 
and  had  determined  the  sphere  of  its  operations  in  accord- 
ance with  the  opinions  then  held  of  the  functions  of  a 
bank;  but  had  refrained  from  influencing  the  particular 
form  of  its  transactions,  or  the  disposal  of  its  resources,  or 
the  creation  of  liabilities. 

The  restrictions  of  the  note  issue  and  liabilities  to  the 
amount  of  the  capital  stock  can  not  be  looked  upon  as 
an  administrative  principle  any  more  than  the  permanent 
clause  forbidding  loans  to  the  Government  without  pre- 
vious authorization  from  Parhament.  The  first  rule  was 
only  inserted  in  order  that  the  extent  and  starting  point 
of  the  shareholders'  liability  might  be  legally  determined; 
it  was  not  repeated  after  1708.  The  latter  clause  arose 
out  of  the  constitutional  and  not  out  of  the  economic 
preoccupations  of  Parliament.  The  relation  of  the  Bank 
to  the  Government  was  thus  marked  off  by  no  legal  regu- 
lation. The  Bank  is  neither  a  government  institution 
nor  under  government  influence,  and  in  this  respect  differs 
essentially  from  the  continental  banks  founded  either  at 


76 


The     English     Banking     System 

the  same  time  or  during  the  eighteenth  century.  Its  only- 
connection  with  the  Government  was  of  an  economic 
character.  For  the  State  the  Bank  was  an  indispensable 
institution  for  the  supply  of  credit  facilities,  an  institu- 
tion which  it  had  indeed  created  by  the  grant  of  a  monop- 
oly, but  with  regard  to  the  conditions  of  whose  existence 
it  troubled  no  further.  The  fact  that  in  spite  of  this  the 
bond  between  the  Bank  and  the  Government  has  come 
to  be  indissoluble  is  to  be  explained  by  the  growth  of 
particular  connections,  which,  however,  have  not  affected 
the  legal  relations  of  the  two. 

With  regard  to  the  Bank's  relation  to  the  administra- 
tion of  finance  in  particular,  we  have  seen  that  no  refer- 
ence is  made  to  this  in  the  original  act.  Nor  was  the 
relation  subsequently  regulated  by  law.  In  fact  the  con- 
nection grew  up  in  the  course  of  the  next  century  without 
receiving  any  legal  regulation  whatever.  The  practical 
administration  of  the  finances  was  gradually  subjected  to 
such  modifications  as  ended  in  the  assumption  by  the 
Bank  of  the  functions  of  the  Exchequer,  while,  owing  to 
the  peculiar  evolution  of  the  system  of  public  indebted- 
ness, the  Bank  received  a  share  in  the  administration  of 
the  debt  and  ultimately  took  over  its  entire  management. 
This  development  had  some  connection  with  the  eco- 
nomic monopoly  granted  to  the  Bank,  since  the  Govern- 
ment was  further  stimulated  by  it  to  continue  this 
monopoly. 


77 


PART  II. 

THE  RELATIONS  BETWEEN  THE  BANK  AND  THE  ADMINIS- 
TRATION OF  THE  PUBLIC  DEBT  AND  OF  THE  PUBLIC  MONEY 
DURING  THE  EIGHTEENTH  CENTURY. 

Even  a  general  history  of  the  Bank  of  England  must,  in 
reference  to  the  eighteenth  centur}^  be  concerned  pri- 
marily with  the  Bank's  relations  to  the  Government. 
And  this  not  only  because  during  this  century  its  financial 
assistance  became  specially  important,  but  more  particu- 
larly because  it  was  these  relations  which  gradually 
secured  for  the  Bank  a  share  in  the  financial  administra- 
tion, and  hence,  in  the  natural  course  of  things,  strength- 
ened and  maintained  its  monopolx'.  This  transference 
of  public  business  to  the  Bank  was  made  in  two  different 
directions,  in  a  completely  independent  way.  Its  par- 
ticipation in  the  management  of  the  public  debt  developed 
quite  apart  from  its  participation  in  the  administration 
of  public  money.  The  one  function  did  not  lead  to  an 
increased  exercise  of  the  other,  except  that  the  transac- 
tion of  government  business  in  either  department  resulted 
in  a  general  increase  in  the  importance  of  the  Bank's 
position  and  the  respect  with  which  it  was  regarded.  The 
Bank's  cooperation  in  these  branches  of  financial  admin- 
istration received  no  legal  sanction  during  this  century. 
By  the  end  of  the  century  it  was,  however,  clear  that  the 
natural  strength  of  tradition  and  the  influence  already 
won  would  secure  it  a  permanent  and  definite  share  in  the 


78 


The     English     Banking     System 

financial  administration.  But  just  as  its  administration 
of  the  debt  and  its  administration  of  the  pubhc  money  were 
substantiaUy  distinct  and  developed  independently  in  fact, 
so  the  growth  of  its  activities  in  these  directions  was  not 
uniform.  The  year  1751  marks  the  time  after  which  it 
seems  to  have  been  accepted  that  the  Bank  alone  should 
share  in  the  management  of  the  public  debt,  although  this 
opinion  found  no  legal  expression.  Suggestions  made  at  a 
later  date  to  withdraw  the  management  of  the  debt  from 
it  were  without  effect.  As  regards  the  public  money,  it 
was  not  until  much  later,  in  1 780,  that  the  Government 
seriously  considered  the  principle  that  this  should  be  man- 
aged by  the  Bank.  The  previous  development  had  been 
independent  of  any  law  or  administrative  order.  The 
measures  taken  after  1780  lose,  however,  all  significance 
unless  they  are  connected  with  the  working  out  of  this 
principle  during  the  early  decades  of  the  nineteenth 
century.  Hence,  it  is  advisable  to  arrange  in  chronolog- 
ical order  our  account  of  the  process  by  which  the  Bank 
came  to  take  part  in  the  management  of  the  public  debt 
and  public  money.  However  the  several  phases  of  this 
development  are  distributed  within  our  period,  it  is 
indubitably  the  central  characteristic  feature  of  the  his- 
tory of  the  Bank  during  the  eighteenth  century.  It  was 
not  until  the  beginning  of  the  nineteenth  century  that  the 
need  for  a  reorganization  of  the  financial  administration 
in  both  departments  led  to  a  legal  recognition  of  the  posi- 
tion developed  during  the  eighteenth  century.  Hence 
the  description  of  this  position  in  what  follows  does  not 
end  exactly  with  the  century. 


79 


National     Monetary     Commission 


I.    THE    EVOIvUTION    OF    THE    NATIONAL    DEBT    AND    OF    ITS 
ADMINISTRATION. 

A.  The  principle  of  tlie  incorporation  of  public  debt  as 
recognized  at  the  foundation  of  the  Bank,  and  its  subse- 
quent application. 

I.    THE    PRINCIPLE    OF    IXCORPORATION. 

Had  there  been  any  intention  in  founding  the  Bank  to 
create  a  loan  institution  by  whose  means  money  could  be 
more  easily  raised  on  the  short-term  paper,  no  disappoint- 
ment need  have  been  felt,  as  we  have  already  remarked, 
with  regard  to  the  Bank's  efficiency  in  this  matter.  The 
very  first  return  issued  by  the  Bank,  which  was  laid  before 
the  House  of  Commons  on  November  lo,  1696,  shows 
clearly  the  important  share  taken  in  the  business  con- 
nected with  the  government  bills.  The  Bank  held 
£1,784,576  in  tallies  on  various  funds,  out  of  total  assets 
amounting  to  £2,101,187.«     B"t  this  assistance,  repeated 

a  The  return  is  published  in  the  Journals  of  the  House  of  Commons, 
1696,  and  also  by  various  writers,  e.  g.,  Fairman,  loc.  cit.,  p.  46,  and  is 
as  follows: 


To  sealed  bills  out- 

£ 

s. 

By  tallies  on  several 

standing  

893. 

800 

parliamentary    se- 

£ 

s. 

To    notes    for    run- 

curities      I 

784. 

576 

16 

ning   cash 

764, 

196 

ID 

By  half  a  year's  de- 

To money  borrowed 

ficiency      of      the 

in  Holland 

300. 

000 

fund  of  £100,000 

To  interest  due  on 

per  annum 

50, 

000 

bank     bills     out- 

By     cash,      pawns, 

standing  

17. 

876 

mortgages,  etc .  .  . 

266, 

610 

16 

1.975. 

872 

ID 

Rest 

125, 

315 

2 

2,  lOI, 

187 

12 

2 

lOI, 

187 

12 

80 


The     English     Banking     System 

and  permanent  though  it  was,  did  not  constitute  the 
chief  significance  of  the  Bank  of  England  for  pubhc 
credit.  The  Bank  owed  its  very  existence  to  a  govern- 
ment loan  transaction.  The  loan  act  of  1694  bestowed 
the  privilege  of  a  corporation  upon  the  public  creditors, 
and  this  promise  was  carried  out  by  the  charter  of  July  27. 
The  Bank  of  England  was  thus  formed  into  a  company 
for  the  transaction  of  banking  business,  whose  capital 
stock  consisted  of  a  loan  to  the  Government.  Over  this 
loan  the  Bank  had  no  control.  It  could  not  be  redeemed 
as  far  as  the  Bank  was  concerned,  but  was  only  repayable 
'e  desire  of  the  Government.  This,  if  we  neglect  the 
bankers'  debt,  which  owed  its  existence  to  a  passing 
impulse,  marks  a  new  principle  in  the  administration  of 
debt.  The  foundation  of  the  Bank  of  England  forms  the 
transition  from  the  system  of  floating  to  that  of  funded 
debt,  and  it  is  perhaps  not  a  mere  chance  that  the  method 
selected  was  that  of  incorporating  the  government 
creditors  into  a  privileged  company.  Similar  incorpora- 
tions of  government  debts  are  phenomena  which  continu- 
ally recur  in  the  history  of  state  systems  of  credit. 
They  are  especially  frequent  in  Italy,  and  it  is  most 
probable  that  the  banks  of  Genoa  and  of  Venice  came  into 
existence  in  this  way.*^  It  is  not  unreasonable  to  sup- 
pose, considering  the  constant  attention  with  which  all 
European  banks  were  studied  by  Englishmen  at  the  end 

o  Cf.  Endemann,  "  Studien  zur  rom.  Kan.  Wirthschaftslehre,"  p.  438,  455 ; 
with  reference  to  the  Bank  of  Genoa,  see  a  monograph  by  Prince  Adam 
Wiszniewski,  "Histoire  de  la  banque  de  Saint-Georges,"  Paris,  1865,  p.  2 
et  seq.,  p.  17  et  seq.;  Vetor  Sandi,  "  Principii  della  storia  de  la  republica  de 
la  Venezia,"  Vol.  II,  p.  148  et  seq.;  Vol.  VI,  p.  892  et  seq.  gives  some  par- 
ticulars of  the  origin  of  the  Bank  of  Venice. 

68299°— II 6  81 


National    Monetary     Commission 

of  the  seventeenth  century,  that  the  histon^  of  the  creation 
of  these  banks  influenced  the  manner  in  which  the  Bank 
of  England  was  estabUshed.  Indeed,  the  repetition  of 
such  loans  during  the  decades  immediately  following  the 
foundation  of  the  Bank  makes  it  almost  appear  as  if  the 
principle  of  incorporation  had  become  a  recognized  rule 
for  the  administration  of  debt.  In  any  case,  it  became 
of  great  importance  in  the  later  developments  of  the 
administration  of  public  debt  in  England,  owing  to  the 
type  of  management  to  which  it  led. 

The  few  important  loans  which  had  hitherto  been 
authorized  by  Parliament,  the  annuity  loan  in  i693And 
the  lottery  loan  in  1694,  were  managed  by  the  Exchequer. 
The  Government,  which  was  obliged  to  deal  directly 
with  each  individual  creditor,  had  the  books  relating  to  the 
loans  kept  at  the  Exchequer.  In  these  books  transfers 
were  recorded,  reference  to  them  determined  claims  of 
ownership,  verification  of  lottery  tickets,  etc.,  and  in  them 
due  payment  of  the  interest  was  entered.  The  debt  to 
the  Bank  of  England  was  different  in  form.  In  this 
case  the  Government  had  but  one  creditor,  the  Bank,  to 
whom  it  owed  the  entire  amount  of  the  loan;  but  the 
repayment  was  under  its  own  control.  The  interest  on 
the  loan  had  to  be  paid  in  a  lump  sum.  Hence  the 
management  of  the  debt  passed  out  of  the  hands  of  the 
Government.  Its  function  was  confined  to  the  transfer 
from  the  Exchequer  to  the  Bank  of  the  sum  required  to 
pay  the  interest 

The  business  formerly  connected  w4th  the  management 
of  the  public  debt  passed  to  the  Bank.     But  the  Bank 


82 


The     English     B  a  n  k  i  ft  g     System 

merely  administered  its  own  capital  like  any  other  com- 
pany. The  individual  who  had  contributed  something 
to  the  government  loan  and  had  thus  become  a  member 
of  the  corporation  established  by  act  of  Parliament  and 
charter,  had  in  fact  no  claim  on  the  State;  he  was  simply 
entered  in  the  books  of  the  corporation  as  entitled  to  such 
and  such  a  share  in  the  capital  of  the  company,  i.  e.,  in 
the  public  debt.  He  could  not  claim  interest  from  the 
Government,  but  the  amount  corresponding  to  his  stock 
was  allotted  to  him  out  of  the  interest  assigned  to  the 
company  by  the  Government.  If  he  alienated  his  claim 
to  capital  and  interest  and  the  corresponding  transfer 
was  entered  in  the  books  of  the  Bank,  the  property  thus 
transferred  was  in  fact  a  claim  on  a  public  debt.  This  is 
the  position  which  resulted  from  the  "incorporation  of 
the  national  debt."  The  public  creditors  were  formed 
into  a  corporation  in  order  to  administer  the  debt,  which 
was  managed  like  the  ordinary  working  capital  of  a 
company. 

At  the  same  time  the  management  of  the  company's 
business  appeared  as  an  essential  part  of  the  transaction, 
so  that  anyone  who  advanced  money  to  the  Government 
might  expect  to  receive  a  profit  from  the  business  trans- 
actions as  well  as  the  regular  interest  paid  by  the  State. 

Hence,  such  loans  could  not  fail  to  be  a  success,  espe- 
cially as  the  original  subscribers  had  the  prospect  in  any 
case  of  a  profit  due  to  a  rise  in  the  price  of  the  capital 
stock.  And  indeed  it  must  be  attributed  to  this  cir- 
cumstance that,  even  during  the  times  of  scarce  money 
at  the  beginning  of  the  eighteenth  century,  the  Govern- 


83 


National    Monetary     Commission 

ment  obtained  supplies  not  only  by  adding  to  the  capital 
stock  of  the  Bank  of  England,  but  also  by  the  creation  of 
new  companies." 

2.    THE   ATTEMPT   TO    ESTABLISH    A    LAND    BANK. 

Even  in  1695  an  attempt  was  made  to  found  another 
such  institution.  A  land  bank  was  to  be  created  which 
on  the  one  hand  was  to  raise  a  loan  on  mortgage,  and  on 
the  other  was  to  supply  the  Government  with  means  to 
carry  on  the  French  war. 

The  act  7  and  8  Will.  Ill,  c.  31,  made  perpetual  a  law 
passed  in  5  and  6  Will.  Ill  imposing  certain  taxes 
on  salt  and  earthenwares,  and  set  aside  the  sums  thus 
raised  for  the  payment  of  such  persons  as  should, 
upon  this  security,  advance  £2,564,000  before  August  i, 
1696.  The  subscribers  were  to  form  a  corporation 
under  the  title  of  "The  Governor  and  Company  of 
the  National  Land-Bank,"  and  to  have  the  right  to 
invest  in  landed  property  and  to  undertake  the  adminis- 
tration thereof.  The  shares  in  the  original  stock  were 
divisible  and  transferable.  The  subscribers  were  to  be 
paid  7  per  cent  per  annum  out  of  the  proceeds  of  the 
above-mentioned  taxes  on  the  amount  subscribed-  The 
Bank  of  England  was  expressly  forbidden  to  subscribe. 
No  official  of  the  one  company  might  hold  shares  in  the 

«  Persons  were  not  wanting,  however,  who  lamented  this  circumstance, 
"  The  Public  Creditors,  by  being  removed  from  the  Exchequer,  have  not 
the  same  Security  of  the  National  Faith  and  Justice  for  the  punctual 
Payment  of  their  Principal  and  Interest,  which  they  had  before,  but  are 
too  much  exposed  to  the  Danger  of  becoming,  one  Time  or  other,  the 
Property  of  their  Managers."  ("Some  Considerations  on  the  National 
Debt,"  London,  1729.  p.  72.) 


84 


The     English     Banking     System 

other;  in  fact  no  person  might  hold  stocks  in  both  com- 
panies at  the  same  time,  under  penalty  of  forfeiting  them. 
The  company  was  forbidden  to  lend  money  to  the  Crown 
without  the  consent  of  Parliament  under  penalty  of  for- 
feiting the  sum  lent,  one-fifth  of  which  sum  was  paid  to 
the  informer,  while  four-fifths  were  devoted  to  public  pur- 
poses. All  the  privileges  of  the  corporation  ceased  on 
repayment  of  the  debt,  which  repayment  was  only  pos- 
sible after  a  year's  notice.  The  trustees  elected  by  the 
subscribers  of  the  loan  drew  up,  on  August  lo,  1695,  a 
settlement  determining  the  organization  and  adminis- 
tration of  the  Bank,  which  was  accepted  by  the  share- 
holders and  registered  by  the  court  of  chancery.  This 
authorized  the  trustees  to  take  up  mortgages  on  land  up 
to  three-fourths  of  its  value  at  an  interest  of  3  >^  to  4  per 
cent.  They  might  issue  bills  up  to  the  amount  of  their 
outstanding  claims,  which  bills  were  to  bear  interest  at  a 
rate  fixed  by  the  trustees.  These  bills  were  to  be  cashed 
on  repayment  of  the  capital  lent,  and  were  to  be  called  in 
for  this  purpose.  A  reserve  fund  was,  however,  to  be 
established  so  that  the  convertibility  of  the  bills  might 
not  rest  entirely  on  security  in  real  property.  Should  the 
loan  not  be  repaid  the  trustees  might  use  legal  means  to 
recover  it. 

The  land  bank,  however,  never  came  into  existence. 
The  act  stipulated  that  a  quarter  of  the  subscriptions  must 
be  paid  at  once  and  the  rest  before  January  i,  1696,  under 
penalty  of  forfeiting  the  claim  on  the  amount  paid  in. 
The  subscription  list   was  filled  within  ten  days   of  its 


85 


National    Monetary     Commission 

issue,  but  the  money  was  not  paid  in,  and  hence  the  whole 
project  fell  through. « 

3.    THE    EAST    INDIA    COMPANY.  ji 

In  1600  Queen  EHzabeth  granted  to  a  company  of  mer- 
chants, by  means  of  letters  patent,  exclusive  rights  to  trade 
with  all  countries  between  the  Cape  of  Good  Hope  and  the 
Straits  of  Magellan.  The  capital  of  the  company 
amounted  to  £72,000  in  £50  shares,  and  was,  after  some 
years,  amalgamated  into  a  joint  stock  company  (1613). 
Under  the  name  of  "The  Governour  and  Company  of 
Merchants  of  London  trading  into  the  East  Indies,"  it 
carried  on  its  exclusive  trade  until  the  time  of  the  Com- 
monwealth. Cromwell  dissolved  it  in  1655  and  made  the 
trade  free.  In  1661  it  was  reinstated  by  Charles  II  and 
its  charter  was  afterwards  renewed  from  time  to  time. 
In  1693  it  forfeited  its  privileges  on  account  of  the  non- 
payment of  a  5  per  cent  tax  imposed  on  its  capital,  but  in 
the  same  year  it  was  reconstituted  and  its  charter  ex- 
tended until  1 701.  The  capital  of  the  company  now 
amounted  to  £744,000.^  The  granting  of  all  these  char- 
ters was  an  exercise  of  the  royal  prerogative  which  laid 

«In  contradiction  of  the  statement  made  by  various  authors  that  no 
subscriptions  were  offered,  see  Ralph,  "  History  of  England,"  Vol.  II,  p.  658, 
and  also  the  settlement  which  was  not  drawn  up  until  after  the  subscription 
had  taken  place.  This  settlement  is  printed  in  Lord  Somers'  Tracts,  Vol. 
XI,  "The  Settlement  of  the  Land  Bank."  Although  never  carried  out  it  is 
of  great  interest  as  the  first  attempt  at  an  institution  for  making  loans  on 
mortgage,  and  its  substance  is  given  in  Appendix  II. 

Ö  Return  on  Public  Income  and  Expenditure,  II,  p.  532.  In  1772-3  the 
House  of  Commons  appointed  a  committee  to  inquire  into  the  position  of 
the  East  India  Company,  the  first  report  of  which  contains  a  list  of  the 
charters  granted  to  the  company. 


86 


The     English     Banking     System 

the  company  under  no  obligation  to  the  Government  and 
did  not  make  its  existence  depend  on  the  fulfihnent  of 
any  such  obligation.  But  in  1698  the  rights  of  a  corpo- 
ration and  trading  privileges  were  promised  to  any  person 
or  persons  who  should  advance  to  the  Government  two 
millions  at  8  per  cent.  This  proposal  was  embodied  in 
an  act  of  Parliament,  9  and  10  Will.,  Ill,  c.  44,  as  had  been 
done  in  the  case  of  the  Bank  of  England  four  years  pre- 
viously, and  of  the  intended  land  bank. 

This  act  of  Parliament «  increased  and  prolonged  some 
existing  taxes,  imposed  new  ones,  and  united  the  whole 
proceeds  into  a  fund  out  of  which  an  annuity  of  £160,000 
was  to  be  paid  to  the  subscribers  of  the  two  millions. 
The  subscriptions,  from  which  the  Bank  of  England  was 
again  excluded,  must  be  not  less  than  £100  each.  One- 
tenth  of  the  sum  must  be  paid  at  once  and  the  remaining 
tenths  at  intervals  of  two  months.  If  the  first  tenth  were 
not  paid  in,  the  subscription  was  to  be  canceled.  If  the 
remaining  portions  were  not  paid,  the  first  payment  was 
to  be  forfeited  and  the  £160,000  annuity  was  to  be  pro- 
portionately reduced.  In  order  that  the  Government 
might  obtain  the  use  of  the  money  sooner,  it  was  empow- 
ered to  issue  tallies,  which  were  to  be  paid  every  three 
months  by  the  commissioners  appointed  to  receive  sub- 
scriptions, and  which  bore  interest  at  8  per  cent.  The  said 
commissioners  must  enter  all  subscriptions  accurately  in 
a  book  and  send  duplicates  of  these  entries  to  the  Ex- 
chequer, which  duplicates  were  there  registered  by  the 

a  The  title  is  "An  Act  for  raising  a  sum  not  exceeding  two  millions  upon 
a  fund  for  payment  of  Annuities  after  the  rate  of  eight  Pounds  per  Centum 
per  Annum,  and  for  settling  the  Trade  to  the  East  Indies." 


87 


National    Monetary     Commission 

auditor  of  the  receipt  and  the  clerk  of  the  pells.  Each 
subscriber  could  obtain  gratis  a  sealed  copy  of  the  entry 
which  concerned  him.  The  money  thus  subscribed  was 
to  form  the  principal  stock  of  a  corporation  into  which  all 
the  subscribers  were  constituted  by  means  of  letters  pat- 
ent from  the  King.  The  corporation  was  to  be  called 
"The  General  Society  intituled  to  the  advantages  given 
by  an  act  of  Parliament  for  advancing  a  sum  not  exceeding 
two  millions  for  the  service  of  the  Crown  of  England,"  and 
under  this  name  it  was  to  enjoy  "perpetual  succession  and 
the  use  of  a  common  seal."  The  subscribers  were  to  elect 
25  trustees  in  a  general  meeting,  at  wliich  only  those  who 
had  subscribed  at  least  £500  might  vote,  and  none  had 
more  than  one  vote.  Each  trustee  must  have  subscribed 
at  least  £2,000.  The  members  of  the  society  had  exclu- 
sive rights  to  trade  to  the  East  Indies  and  to  such  coun- 
tries in  Asia,  Africa,  and  America  as  lie  between  the  Cape 
of  Good  Hope  and  the  Straits  of  Magellan.  But  no  one 
might  trade  for  more  than  the  amount  of  his  share  in  the 
principal  stock. 

The  claim  to  the  annuity  paid  by  the  Government  was 
a  claim  owned  by  each  individual  member  in  proportion 
to  the  amount  of  his  share.  If,  however,  the  subscribers 
wished  to  form  a  joint  stock  company  they  might  be  rec- 
ognized as  such;  but  the  company  so  fonned  was  to  be 
"restrained  to  such  portion  of  the  trade  in  the  whole  as 
all  the  particular  members  thereof  would  have  been  enti- 
tled to"  had  it  not  been  formed.  In  this  case  the  Gov- 
ernment annuity  would  be  paid  to  the  company.  The 
members  must  trade  only  as  a  company  and  must  take  an 


The     English     Banking     System 

oath  to  "be  faithful  to  the  General  Society"  and  not  to 
trade  for  more  than  the  allowed  amount.  Out  of  regard 
to  the  existing  privileges  of  the  Bank  of  England  the  com- 
pany was  expressly  forbidden  to  advance  money,  to  dis- 
count bills  of  exchange  or  other  bills  or  notes,  or  to  borrow 
any  money  beyond  what  was  required  to  buy  goods  or 
commodities  for  exportation,  to  issue  bills  of  exchange 
payable  in  less  than  six  months,  or  to  "  keep  any  books  or 
cash"  for  any  person  or  corporation.  In  common  with 
the  Bank  of  England,  however,  its  annuities  and  shares 
were  exempt  from  taxes,  and  no  member  could  be  adjudged 
bankrupt  in  respect  of  his  stock  only.  The  existing  "  Com- 
pany of  Merchants"  was  to  remain  undisturbed  until 
September  29,  1701,  notwithstanding  the  privileges 
granted  to  the  General  Society. 

The  establishment  of  the  new  society  was  due  to  the 
refusal  of  the  existing  company  to  make  a  loan  of  more 
than  £700,000,  whereupon,  at  the  request  of  the  treasurer, 
Montague,  a  number  of  merchants  came  forward  and  de- 
clared their  willingness  to  advance  two  millions  at  8  per 
cent  in  return  for  the  privileges  later  set  forth  in  the  act. 
In  spite  of  various  petitions  from  the  East  India  Company 
and  vigorous  opposition  in  Parliament,  the  act  was 
forced  through.«  On  September  3,  1698,  the  corporation 
received  its  charter  as  the  "General  Society,"  etc.  But 
on  September  5  it  was  constituted  at  its  own  request  into 
a  joint-stock  company  and  received  the  name  of  "The 
English  Company  Trading  to  the  East  Indies."  The  older 
company,  being  unable  to  prevent  the  formation  of  the 

0  Cf .  SmoUet,  "History  of  England,"  London,  1758,  Bk.  vi.,  p.  245. 


89 


I 


N  at  i  0  71  a  I     Monetary     Commission 

new  competing  society,  had  itself  taken  part  in  the  sub- 
scription and  had  contributed  £315,000.«  This  poHcy 
proved  advantageous,  since  the  new  company  quickly  be- 
came prosperous  and  soon  sent  out  twice  as  many  goods  as 
the  older  one,*  though  it  always  kept  within  the  legal  limits. 

The  relations  between  the  two  companies  were,  more- 
over, friendly,  so  that  on  July  22,  1702,  an  indenture  of 
amalgamation,  approved  by  the  Queen,  was  agreed  to.<^ 
The  older  company  agreed  to  purchase  sufficient  stock 
from  the  English  Company  to  make  the  holdings  of  the 
two  equal.  For  seven  years  the  management  remained 
separate  and  the  profits  were  divided.  After  this  a  single 
company  was  formed  under  the  name  of  "The  United 
Company  of  Merchants  of  England  Trading  to  the  East 
Indies."  This  United  Company  advanced  £1,200,000  to 
the  Government  without  interest  and  received  in  return 
permission  to  borrow  money  to  the  amount  of  one  and  one- 
half  millions,  or  to  call  in  money  from  its  members.  Also 
its  trading  privileges  were  extended  until  March  25,  1726, 
after  which  date  the  corporation  might  cease  upon  three 
years'  notice,  on  condition  that  all  government  debts  to  it 
were  repaid. 

The  total  government  debt  to  the  East  India  Company 
was  now  (1709)  £3,200,000,  for  which  £160,000,  i.  c.,  an 
interest  of  5  per  cent,  was  paid. 

«  This  and  the  change  of  name  is  referred  to  in  6  Anne,  c.  17. 

i»  T.  Cunningham,  "The  merchant's  Lawyer  or  the  Law  of  Trade  in 
General,"  London,  1762,  reckons  the  value  at  a  million  pounds,  as  com- 
pared with  £500,000  for  the  older  company. 

c  The  essentials  of  this  indenture  are  contained  in  6  Anne,  c.  17.  The 
detailed  settlement  of  all  controversial  points  was  intrusted  to  Sidney, 
Earl  of  Godolphin,  the  Lord  High  Treasurer. 


90 


The     English     Banking     System 

4.    THE   SOUTH    SEA   COMPANY. 

In  spite  of  the  enormous  loans  which  were  raised  through 
the  foundation  of  the  Bank  of  England  and  the  General 
Society,  and  through  the  union  of  the  latter  with  the  East 
India  Company,  and  in  spite  of  lottery  and  annuity  loans, 
the  government  debt,  through  anticipation  by  tallies  and 
through  arrears  of  payment,  still  continued.  They  were 
extended  from  one  year  to  another  and  led  not  only  to  a 
heavy  burden  in  interest,  but  to  confusion  throughout  the 
public  finances.  They  consisted  of  bills  issued  in  different 
years,  varying  in  amount  and  interest,  falling  due  at  dif- 
ferent times,  and  charged  on  a  corresponding  number  of 
different  heads  of  revenue.  Whatever  security  was  gained 
by  the  creditors  through  the  ear-marking  of  a  definite  fund 
led  to  the  insecurity  of  the  whole  floating  debt,  because, 
owing  to  the  uncertainty  of  the  receipts,  there  was  no 
covering  for  certain  debts,  while  in  other  departments 
there  was  a  surplus,  which  could  not,  however,  be  diverted. 
The  value  of  the  short-term  bills  had  consequently  fallen 
considerably,  as  had  been  the  case  before  the  foundation 
of  the  Bank.  As  the  act  establishing  the  South  Sea  Com- 
pany states :  A  "great  part  of  the  tallies  and  orders  *  *  * 
are  in  the  hands  of  the  respective  treasurers  or  paymas- 
ters *  *  *  and  cannot  be  disposed  of  without  great 
loss  and  discount,  and  to  the  damage  of  the  public  credit; 
and  other  part  of  the  tallies  and  orders  *  *  *  are  or 
may  be  in  the  hands  of  such  person  or  persons  as  may  be 
better  pleased  with  the  perpetual  interest,  after  the  rate  of 
six  pounds  per  centum  per  annum,  redeemable  by  Par- 
liament    *     *     *," 


91 


I 


National     Monetary     Commission     j 

Hence  in  1 7 1 1  it  was  decided  to  consolidate  the  whole 
floating  debt  into  an  interest-bearing  fund,  which  might 
be  repaid,  but  which  could  not  be  realized  at  the  will  of  the 
creditor.  It  was  believed  that  this  was  impossible  unless 
the  creditors  received  special  privileges.  Consequently 
recourse  was  had  once  more  to  the  approved  method  of 
granting  corporation  rights  and  trading  privileges  to  them, 
The  South  Sea  Company  was  thus  established  by  9 
Anne,  c.  21,  which  act,  as  usual,  contained  also  other 
disconnected  provisions."  The  principal  contents,  so  far 
as  they  concern  the  South  Sea  Company,  are  as  follows: 
After  enumerating  all  the  outstanding  unfunded  debts, 
certain  duties  referred  to  in  8  Anne,  c.  13,  which  had  been 
imposed  in  previous  acts  continued  thereby,  were  now 
made  perpetual;  their  proceeds  were  assigned  to  the  pay- 
ment of  a  6  per  cent  annuity  to  the  creditors,  and  were  to 
be  handed  over  to  the  commissioners  of  customs,  excise, 
and  stamps.  The  commissioners  were  to  keep  such  mon- 
eys apart  and  to  pay  them  weekly  into  the  Exchequer, 
where  they  were  to  be  assigned  to  a  fund  for  the  above- 
mentioned  payment.  If  this  fund  proved  deficient  in  the 
course  of  the  year  the  deficit  was  to  be  made  up  by  the 
treasurer  of  the  navy  out  of  "such  public  money,  tallies, 
orders,  or  other  parliamentary  securities"  as  were  in  his 
hands  at  the  time.  The  cashier  of  the  corporation  to  be 
erected  was  to  give  a  receipt  to  the  treasurer  for  these 
sums,   which   receipt    was   to   be   admitted   as   sufficient 

o  The  title  is  "  An  Act  for  making  good  Deficiencies  and  satisfying  the 

public  Debt  and  for  erecting  a  corporation  to  carry  on  a  Trade  to  the  South 

Sea  and  for  the  encouragement  of  the  Fishery  and  for  Liberty  to  trade  in 

•unwrought  iron  witJi  the  subjects  of  Spain  and  to  repeal   the   Acts  for 

registering  seamen." 


92 


1 


The     English     Banking     System 

voucher  for  the  treasurer's  accounts.  In  order  to  make 
this  transference  of  money  as  simple  as  possible,  an  esti- 
mate, based  on  a  three-yearly  average  of  the  amount  the 
funds  would  produce,  was  to  be  laid  annually  before  Par- 
liament, so  that  it  might  make  "good  and  timely  provi- 
sion "  to  meet  any  deficiency.'^  An}^  surplus  was  to  be 
applied  to  repaying  the  principal  debt.  All  persons  con- 
cerned in  the  debts  in  question  might  be  incorporated  by 
Her  Majesty  by  letters  patent. 

The  corporation  thus  formed  was  to  have  the  exclusive 
privilege  of  trading  to  the  South  Seas  and  to  the  east  coast 
of  America  from  "  the  river  of  Aranoco  to  the  southernmost 
part  of  the  Terra  del  Fuego  "  and  to  the  whole  of  the  west 
coast  and  to  all  places  within  300  leagues  of  the  coast. 
The  Portuguese  colonies  were  excepted,  and  the  entire 
trade  of  the  company  was  to  be  confined  to  the  districts 
indicated.  The  stock  was  exempted  from  the  operation 
of  the  bankruptcy  laws,  and  both  it  and  the  annuity  were 
exempt  from  taxes.  By  Clause  XLVIII  the  transactions 
of  the  company  were  limited  out  of  regard  to  the  privileges 
of  the  Bank  of  England,  in  the  same  way  as  those  of  the 
East  India  Company.  No  person  might  be  at  the  same 
time  director  or  governor  of  the  Bank  and  of  the  South 
Sea  Company.     The  company  might  issue  bonds  under  its 

0  This  use  of  the  money  assigned  to  the  navy  was  the  less  remarkable 
since  the  navy  was  universally  looked  upon  as  the  department  whose 
credit  was  the  best.  In  the  first  of  the  four  letters  on  the  national  debt 
already  referred  to  ("The  Debts  of  the  Nation,  stated  and  considered  in  four 
papers,  1712,"  Lord  Somers'  "  Tracts, "  Vol.  XIII)  the  amount  of  the  navy 
debt  was  accounted  for  by  the  fact  that  the  deficiencies  in  public  supplies 
were  met  out  of  the  money  assigned  to  the  navy.  "  You  need  not  be  told, 
that  far  the  greatest  part  of  the  other  publick  services  admit  of  no  credit 
at  all;  nor  could  any  other  credit  of  any  kind  have  been  had  at  so  easy  terms 
as  in  the  navy"  (p.  310). 


93 


National     Monetary     Commission 

common  seal,  by  means  of  which  its  shares  were  transfer- 
able on  simple  indorsement.  After  December  25,  1716, 
the  debt  was  repayable  by  the  Government  upon  one  year's 
notice,  and  the  company's  privileges  were  to  cease  after 
such  repayment  had  been  made. 

The  debt  incorporated  by  this  act  consisted  of  three 
parts:  (i)  Bills  issued  before  March  25,  171 1  (with  the 
exception  of  exchequer  bills) ;  (2)  arrears  of  payment  for 
the  navy  and  army,  for  which  such  bills  had  not  been 
issued,  also  up  to  this  date;  (3)  £500,000  which  was  still 
needed  for  the  current  expenses  of  the  year  1 7 1 1 .  The 
sums  referred  to  under  heads  (i)  and  (2)  already  carried 
an  interest  of  6  per  cent,  from  the  25th  of  March  to  the 
25th  of  December.  The  interest  was  to  be  added  to  the 
capital,  which,  after  this  had  been  done,  amounted  to 
£9» 1 77.967,  and  on  this  a  yearly  sum  of  £550,678  was 
paid. 

The  foundation  of  the  South  Sea  Company  was  the  last 
time  corporation  rights  were  granted  to  public  creditors. 
Henceforth  the  grant  of  economic  privileges  ceased  to  be 
a  bait  by  means  of  which  the  capital  of  private  persons 
might  be  secured  for  the  purposes  of  public  finance.  On 
one  other  occasion  only  the  grant  of  a  charter  was  made 
conditional  on  a  money  payment,  when  the  Royal  Ex- 
change Assurance  Company  and  the  London  Assurance 
Company  were  established  by  6  Geo.  I,  c.  18.  The  first 
was  authorized  to  insure  ships  and  merchandise  and  to 
lend  money  on  bottomry,  and  for  these  purposes  to  raise 
a  capital  of  one-half  a  million  sterling.  The  latter  was  a 
life-insurance  company.  They  were  to  advance  £300,000 
to  the  Government,  and  Parliament  reserved  the  right 


94 


I 


The     English     Banking     System 

to  withdraw  their  privileges  within  thirty-one  years,  on 
repayment  of  the  debt.  After  £150,000  had  been  paid  no 
further  demands  were  made,  and  this  sum  became  the 
purchase  money  of  the  privileges,  which  were  never  with- 
drawn.'^ 

From  this  time  forward  the  three  great  companies  served 
as  a  lever  by  which  public  credit  could,  in  bad  times,  be 
raised  to  the  position  required  for  the  satisfactory  con- 
duct of  public  finance.  The  leading  statesmen  of  the  time 
were  accused  of  bribery  and  of  seeking  personal  gain 
through  the  foundation  of  the  companies.  Smollett  calls 
them  "the  most  mercenary  and  corrupt  undertakers."'' 
They  had  made  a  monopoly  of  the  banking  business,  had 
formally  partitioned  out  and  made  a  privilege  of  commerce. 
They  had  not  only  not  decreased  the  public  debt  but  had 
actually  made  it  permanent  by  adherence  to  the  prin- 
ciple, once  suggested,  of  an  annuity  debt.  By  vigorous 
efforts  the  nation  might  perhaps  have  paid  off  the  debt 
as  it  fell  due  on  definite  dates,  and  thus  have  freed  the 
present  day  from  its  burden.*^  But  the  converse  is  also 
possible.     There  is  no  doubt  that,  from  the  point  of  view 

«  Fairman,  "An  Account  of  the  Public  Funds,"  London,  1824,  p.  140. 
Return  on  Public  Income  and  Expenditure,  I,  p.  62  et  seq. 

b  Smollett,  "  History  of  England,"  Bk.  VI,  p.  246.  See  also  Burnet,  "His- 
tory of  his  Own  Time,"  Bk.  II,  p.  209.  "It  was  said  that  the  Bank  of  England 
and  the  East  India  Company  being  in  the  hands  of  Whigs,  they  would  have 
the  command  of  all  the  money,  and,  by  consequence,  of  all  the  trade  of 
England."  A  reproach  which  in  reality  implied  praise  of  the  financial 
system. 

c  Blackstone  expressed  a  similar  opinion:  "And  if  our  ancestors  in  king 
William's  time  had  annually  paid,  so  long  as  their  exigencies  lasted,  even 
a  less  sum  than  we  now  annually  raise  upon  their  accounts,  they  would  in 
the  time  of  war  have  borne  no  greater  burdens  than  they  have  bequeathed 
to  and  settled  upon  their  posterity  in  time  of  peace,  and  might  have  been 
eased  the  instant  the  exigence  was  over."  (Commentaries,  Bk.  i,  p.  328, 
edition  of  1830.) 

95 


II 


N  at  ion  al     Monetary     Commission 

of  administration  of  debt  the  course  adopted  was  a  right 
one  and  was  justified  by  its  resuhs.  The  development  of 
national  life  and  the  consequent  increased  need  of  money 
made  the  management  of  loans  an  essential  part  of  finan- 
cial administration  during  the  eighteenth  centur}'.  Thus 
from  an  economic  as  well  as  from  an  administrative  point 
of  view,  the  three  great  companies  were  the  main  support 
of  the  Government.  Hardly  any  loan  transactions  could 
be  managed  without  their  cooperation;  loans  were  raised 
either  from  their  resources  or  by  their  intermediacy,  they 
administered  the  funded  debt  and  helped  to  keep  in  cir- 
culation the  bills  representing  the  unfunded  debt.  Their 
respective  relations  to  the  State  did  not,  however,  retain 
any  similarity.  The  starting  points  of  their  careers  are 
much  alike,  but  ultimately  the  Bank  surs'ived,  in  close 
association  with  the  Government,  whilst  the  other  two 
ceased  to  exist.  In  the  following  section  we  shall  inquire 
into  the  causes  which  forced  on  the  adoption  of  this  system 
of  public  loans.  We  must,  however,  first  consider  the 
history  of  a  form  of  debt  which  had  great  influence  on  the 
general  development  of  English  financial  administration 
and  determined  the  relation  of  the  Bank  of  England  to  the 
Government  and  its  victory  over  the  other  companies. 

B.  History  of  the  exchequer  bills  and  their  importance  in  the 
systoti  of  public  debt. 

In  1696,  when  the  silver  coins  which  for  several  years 
had  been  much  depreciated  from  use  and  clipping,  and  had 
fallen  to  one-third  of  their  nominal  value,  were  called  in, 
it  quickly  became  apparent  that  there  was  not  enough 
available  currency  in  the  country.     The  minting  diu  not 


96 


The     E  71  g  I  i  s  h     Banking     System 

go  on  sufficiently  quickly.  The  new  money  was  hoarded 
by  its  possessors  for  fear  lest  they  should  get  old  and  worn- 
out  coins.  Bank  notes  were  not  suitable  for  small  trans- 
actions since  £20  was  the  lowest  value  issued.  Attempts 
were  made  both  by  the  merchants  and  by  the  Government 
to  remedy  this  scarcity  of  currency,  which  was  universally 
felt.  An  order  that  the  public  revenues  should  be  remitted 
to  London  by  bills  of  exchange  was  issued  at  this  time,  and 
this  expressly  "lest  in  a  time  when  so  much  money  is 
drawn  from  the  People,  to  be  Recoined,  they  should  also 
be  deprived  of  the  Lawrful  Money  remaining  amongst 
them."*^  The  Bank  of  England  undertook  the  business 
of  transfer  in  the  autumn  of  1696.  "  Such  who  think  it  for 
their  Conveniency  to  keep  an  Account  in  a  Book  with  the 
Bank,  may  transfer  any  Sum  or  Sums  not  under  £5  from 
his  own  to  any  other  Mans  Accompt.  "^  Even  before  this 
the  Government  had  intervened  very  beneficially  by  the 
issue  of  "bills  of  credit  payable  upon  demand  at  the 
Exchequer,"  or,  as  they  were  afterwards  called,  exchequer 
bills. 

The  same  act,  which  provided  for  a  loan  through  the 
foundation  of  a  land  bank  (7  and  8  Will.  Ill,  c.  31)  con- 
tained a  clause,  inserted  and  passed  through  Parliament 
by  Montague,  authorizing  the  Treasury  to  issue,  from  time 
to  time,  bills  of  credit  up  to  a  total  value  of  one  and  one- 
half  millions.  These  bills  were  to  be  wor1?h  an  even 
number  of  pounds  (10,  20,  30,  50,  100,  "  or  such  other  sums 
as  shall  be  most  convenient  for  the  accommodation  of 

«  Announcement  by  the  commissioners  of  excise,  London  Gazette,  July  9 
to  13,  1692. 

b  The  bank  directors  give  notice  of  this  in  the  London  Gazette,  November 
23  to  26,  1696. 

68299° — II 7  97 


I 


N  ational    Monetary     Commission 

those  that  shall  accept  the  same").  They  were  to  be 
signed  by  an  officer  of  the  Exchequer,  the  auditor  of  the 
receipt,  "scaled  with  the  public  seal  appointed  for  the 
service  "  by  the  Treasury,  were  to  be  issued  by  the  tellers 
in  the  receipt  of  the  Exchequer,  and  to  bear  the  date  of  the 
day  of  issue.«»  The  bills  bore  interest  from  this  date,  of  3d. 
a  day  per  £100,  i.  e.,  about  ^yi  per  cent.  "  The  voluntary 
acceptance  thereof  shall  be  deemed  to  be  good  Payment 
as  if  the  persons  receiving  the  same  for  Debt,  Rent  or  other 
cause  whatsoever  were  paid  in  lawful!  Coins  of  this  King- 
dom." As  much  coin  was  always  kept  in  the  Exchequer 
as  was  likely  to  be  required  to  keep  in  circulation  the 
number  of  bills  issued,  and,  since  the  land  bank  loan  did 
not  come  into  existence,  the  receipts  from  the  duties 
perpetuated  by  the  act  referring  to  it  were  devoted  to  this 
purpose.  The  sum  of  £4,000  was  placed  at  the  disposal 
of  the  Treasury  for  expenses  of  management,  and  the 
Treasury  was  made  responsible  for  the  due  payment  of  the 
bills  and  for  the  proper  limitation  of  the  issue.  The  Com- 
missioners of  the  Treasury  and  the  Exchequer  officials  were 
liable  to  the  amount  of  their  whole  property  for  any  issue 
exceeding  the  one  and  one-half  millions. 

In  1696  the  issue  of  these  bills  only  amomited  to  about 
£160,000.''  They  proved  themselves  useful  and  were 
favorably  received.  Arrangements  had  been  made  to 
make  them  redeemable  in  other  places  as  well  as  in  Lon- 
don. The  manager  of  such  an  exchequer  bank,  as  the 
offices  for  the  purpose  were  called,  asked  for  fresh  bills  on 

a  Some  information  on  the  method  of  engraving  and  printing  these  bills 
and  binding  them  into  books  is  given  in  a  manuscript  of  the  year  1713, 
which  is  printed  in  the  Return  on  National  Debt,  p.  95. 

b  Return  on  National  Debt,  p.  95. 


The     English     Banking     System 

September  7  and  remarked  that  the  people  "ardently 
craved"  exchequer  bills,  which  they  used  in  their  com- 
merce. The  tuckers  and  traders  paid  them  to  the  weavers 
and  combers,  and  these  latter  brought  them  to  him.« 

The  basis  of  the  bills  was,  however,  changed  by  the 
land-tax  act  of  1697  (8  Will.  Ill,  c.  6).  The  Treasury  was 
again  empowered  to  issue  bills  to  the  amount  of  one  and 
one-half  millions.  These  bills  were  to  "be  current  and 
pass  in  all  payments  to  any  of  His  Majesties  Receivers  or 
Collectors  of  any  Aids  Taxes  or  Supplies  hereby  granted 
or  that  shall  or  may  be  granted  for  the  service  of  the  war 
for  the  year  1697,"  with  the  exception  of  the  land  tax.^ 
They  were  to  be  paid  on  demand  out  of  the  receipts  of 
these  taxes  by  all  receivers,  collectors,  etc.,  to  whom  they 
were  presented,  and  payment  of  taxes  with  them  was 
good  and  legal  payment.  The  clause  concerning  interest 
was  omitted  in  this  act,  but  was  added  in  the  act  passed 
shortly  (three  months)  afterwards  (8  and  9  Will.  Ill,  c.  20). 
This  later  act  contained  further  important  provisions. 
The  bills  might  be  used  in  payment  of  all  taxes  and  duties 
whenever  voted,  with  the  exception  of  the  land  tax.  The 
interest  was  increased  to  5d.  per  day  on  £100.     It  was, 

°'  Treasury  Papers,  1696,  Vol.  XL,  N.  10. 
Ö  The  form  of  these  bills  was  as  follows : 

Exchequer, 

,  1697. 

No. . 

"  By  virtue  of  an  Act  of  Parliament  passed  in  the  VIII  year  of  his  Ma''''^ 
Reign,  this  Bill  entitles  the  Bearer  to  Five  Pounds,  to  pass  in  all  payments 
to  Receiv"  or  Collectors  of  any  Ayds  Taxes  or  Supplys  for  the  service  of 
the  war  for  the  year  1697  (except  y^  III  Shilling  Ayd)  to  be  reed  and 
satisfied  by  y®  said  Receiv'"*  or  Collecf^  under  y'^  Penalties  in  y"  Act  con- 
tained" (Return  on  National  Debt,  p.  97).  Similar  government  notes 
covered  by  funded  receipts  from  taxes  were  issued  in  Denmark  as  early 
as  1673.     Cf.  Marperger,  "  Beschreibung  der  Banken,"  p.  321. 


99 


National     Monetary     Commission 

however,  only  paid  for  such  time  as  the  bill  remained  in 
circulation.  Hence  the  bills  were  to  be  signed  and  dated 
whenever  they  were  paid  into  the  Exchequer  or  any  other 
government  office,  or  whenever  presented  by  the  holder 
to  be  cashed,  or  on  all  occasions  when  they  were  reissued 
by  the  offices  concerned."  For  the  greater  security  and 
convenience  of  the  public  the  Treasiuy  was  authorized  to 
contract  with  any  persons  for  exchanging  and  circulating 
the  exchequer  bills.  Such  persons  were  to  receive  as  a 
bonus  lo  per  cent  on  the  sums  subscribed  by  them  to 
insure  that  the  bills  should  always  be  cashed.  On  April 
9,  1697,  the  Treasury  deposited  in  the  Guildhall  books 
for  the  registration  of  subscriptions.  The  amomit  was 
for  the  time  to  be  £400,000.  On  April  23  the  subscribers 
met  and  elected  twelve  trustees  to  manage  the  money 
subscribed.^  The  money  promised  was  called  in  grad- 
ually up  to  the  end  of  July,  and  at  the  end  of  September 
the  trustees  made  up  the  accounts  of  their  management 
and  paid  14s.  lod.  on  every  £100  out  of  the  interest  re- 
ceived from  the  Treasury  for  the  bills  held  by  them.«^  In 
the  same  year  the  amount  for  which  the  exchequer  bills 
were  issued  was  reduced  to  £5.  On  May  21,  1697,  the 
Treasury  instructed  the  auditor  of  the  receipt,  Sir  R. 
Howard,  "that  in  future  you  make  forth  no  bills  higher 

a  This  gave  occasion  for  frauds  in  the  Exchequer  since  the  officials 
recorded  erroneous  dates  for  the  reissue  and  appropriated  the  interest. 
Such  a  fraud,  perpetrated  in  the  autumn  of  1697,  is  circumstantially  de- 
scribed in  the  Return  on  National  Debt,  p.  97. 

0  See  the  announcement  by  the  Treasury  in  the  London  Gazeiic,  April 
5-8  and  19-22.  Among  o'öiers  the  East  India  Company  subscrilied 
£80,000.  It  called  attention  to  this  later  when  petitioning  against  the 
establishment  of  a  new  East  India  Company. 

c  London  Gazette,  K^r\\  22-26,  April  24-27,  May  15-July  19,  August 
30-September  2. 


The    English     Banking    Syste 


m 


in  value  than  £5  or  £10,"'^  and  since  it  was  known  that 
some  of  the  bills  were  "irregularly"  indorsed,  these  were 
called  in  at  the  end  of  1697  and  exchanged  for  new  ones.^ 

The  exchequer  bills  secured  a  permanent  place  in  Eng- 
lish public  finance  from  the  moment  of  their  first  issue. 
In  8  Will.  Ill,  c.  24,  it  was  decided  to  issue  another 
£1,200,000  worth  of  bills.  These  were  issued  and  kept  in 
circulation  in  the  same  manner  as  before.  9  Will.  Ill, 
c.  2,  arranged  for  an  exchange  of  the  outstanding  bills, 
which  were  overcrowded  with  indorsements,  and  were  thus 
no  longer  fit  for  circulation;  it  was  provided  that  these 
bills  should  be  retained  as  they  were  paid  in  from  time  to 
time  to  the  Exchequer,  and  new  bills  for  a  like  amount 
issued  in  their  place.  A  recall  of  the  bills  for  small  sums 
and  an  issue  of  bills  for  £100,  £50,  and  £25  as  ordered 
by  12  Will.  Ill,  c.  I.  Between  April  26,  1697,  and  August 
27,  1703,  bills  were  issued  to  a  total  value  of  £3,060,000 
of  which  more  than  £500,000  worth  were  outstanding  at 
the  latter  date. " 

The  issue  of  exchequer  bills  was  originally  intended  to 
provide  a  ciu^rency,  to  create  money  or  a  substitute  for 
money,  in  order  to  improve  the  economic  position;  later 
on,  however,  their  issue  was  regarded  as  a  method  of 
borrowing,  which  succeeded  well  on  account  of  the 
security  obtained  by  the  public  from  the  circulation  con- 
tract. People  soon  preferred  the  bills  to  money  because 
they  bore  interest.     Moreover,  at  the  time  of  the  next 

a  London  Gazette,  1697,  No.  3345. 

b  Return  on  National  Debt,  p.  96. 

<^  The  Auditor  of  the  Receipt  had  to  keep  accounts  of  the  issue  and  repay- 
ment, and  of  the  taxes  through  the  receipts  from  which  repayment  was 
made.     Such  an  account  was  laid  before  the  House  of  Commons  in  1703, 


N at i 0  71  a  I    Monetary     Commission 

issue  (1707)  the  national  credit  was  more  firmly  estab- 
lished. "The  credit  of  the  nation  was  never  raised  so 
high  in  any  age,  nor  so  sacredly  maintained.  The 
Treasury  was  as  exact  and  as  regular  in  all  payments  as 
and  private  banker  could  be."«  But  a  scarcity  of  money 
again  made  itself  felt.  The  war  of  the  Spanish  succes- 
sion employed  many  troops  abroad,  who  had  to  be  paid 
in  coin,  since  the  use  of  bills  of  exchange  for  foreign  pay- 
ments had  not  yet  developed.  The  trade  with  Spain 
and  the  West  Indies,  which  had  formerly  brought  much 
money  into  England,  was  now  interrupted.^ 

The  Government  was  able  on  this  occasion  (5  Anne,  c. 
13)  to  issue  exchequer  bills  which  bore  no  legal  interest, 
but  which  might  be  indorsed  to  bear  such  interest  "for 
their  better  circulating."  The  Bank  of  England  was 
empowered  to  determine  whether  interest  should  be  paid 
and  to  what  amount,  and  this  time  an  arrangement  was 
made  with  the  Bank  to  circulate  the  bills  issued,  to  the 
total  value  of  one  and  one-half  millions.  This  was  the 
first  time  that  the  Bank  undertook  mdependently  to 
manage  the  circulation.  In  the  first  contract,  in  April, 
1697,  it  seems  only  to  have  been  concerned  as  the  place 
where  the  bills  were  cashed,  for  £ioo,ock)  was  deposited 
with  it  to  effect  the  exchange." 

a  Burnet,  "History  of  His  Own  Time,"  Vol.  II,  p.  438. 

6  Burnet,  loc.  cit. 

cCf.  Ret.  Nat.  Debt,  p.  96.  Here,  after  it  has  been  mentioned  that  a 
circulation  contract  was  to  be  made,  a  treasury  minute  of  April  16,  1697, 
is  quoted,  with  the  remark:  "The  foUovdng  Treasury  Minute  refers  to  the 
carrying  out  this  last  provision."  The  minute  quoted,  however,  refers 
undoubtedly  merely  to  the  fact  referred  to  in  the  text.  A  second  minute 
of  April  20  refers  to  the  election  of  1 2  trustees,  6  elected  by  the  Bank,  6 
elected  by  the  Treasury,  to  act  as  "overseers"  and  to  "see  daily  that  the 
Bank  has  the  sum  of  £100,000  by  them  for  circulating  exchequer  bills." 


The     English     Banking     S  y  stem 

The  Bank  now  undertook  to  cash  on  demand  all 
exchequer  bills  issued  in  accordance  with  the  act  in  ques- 
tion. If  it  thought  well  to  allow  interest  on  the  bills  in 
order  to  increase  their  credit,  it  must  state  this  on  the  back 
of  such  bills  as  were  to  bear  interest.  The  interest  so 
determined  must  not  only  be  paid  by  the  Bank  on  presen- 
tation of  the  bill  at  any  time,  but  must  also  be  added  to 
the  value  by  the  officers  of  the  Exchequer  when  the 
bills  were  paid  in.  As  before,  the  interest  was  only  paid 
for  the  time  during  which  the  bills  were  in  circulation,  i.  e., 
were  not  in  the  Exchequer.  They  must  be  cashed  within 
twenty-four  hours  at  the  headquarters  of  the  Bank.  In 
case  they  were  not  cashed  at  all,  or  not  at  the  proper  time, 
the  holder  of  the  bill  might  bring  an  action  against  the 
Bank,  and  not  only  was  "  the  money  so  refused  to  be  paid, 
but  also  Damages,  besides  full  Costs  of  Suit."  For 
security  against  forgery,  books  containing  counterparts 
of  the  bills  were  handed  over  to  the  Bank.  If  the  bills 
became  overcrowded  with  indorsements  or  otherwise 
unusable  the  Treasury  could  withdraw  them  at  the 
request  of  the  Bank  and  issue  new  ones  for  the  same 
amounts.  Any  issue  of  bills  beyond  the  amount  specified 
in  the  act,  either  with  or  without  the  consent  of  Parliament, 
must  be  agreed  to  by  the  Bank.  In  compensation  for  its 
trouble  the  Bank  was  to  receive  4X  per  cent  on  the  bills 
issued  at  any  time,  reckoned  for  the  period  during  which 
they  were  not  in  the  Exchequer.  This  allowance  was 
paid  out  of  the  proceeds  of  the  house  duty,  which  was 
made  perpetual  by  the  act.  As,  however,  this  was  aheady 
burdened  with  a  loan  until  1710,  it  was  provided  that  the 
allowance  as  it  fell  due  quarterly  should  be  paid  in  newly 


103 


a 


National     Monetary     Commission 

issued  exchequer  bills,  themselves  bearing  interest  at  4K 
per  cent,  which  interest  was  to  be  paid  as  soon  as  the 
money  from  the  house  duty  was  available.  The  rights 
and  privileges  of  the  Bank  were  secured  so  long  as  the 
Government  did  not  supply  the  money  needed  by  the 
Bank  to  cash  the  bills  and  so  long  as  the  government  debt 
to  the  Bank  arising  out  of  these  transactions  remained 
unpaid.  Such  payment  could  only  be  made  upon  one 
year's  notice  of  the  conclusion  of  the  contract. 

The  exchequer  bills  increased  in  significance  through 
1  these  provisions.  The  earlier  acts  all  contained  the  stipu- 
lation that  the  bills,  so  soon  as  they  were  received  in  pay- 
ment of  taxes  and  the  Treasury  was  in  a  position  to  order 
it,  should  be  canceled  and  the  receipts  of  the  fund  upon 
which  they  were  paid  in  charged  with  the  amount  thereof. 
The  issue  of  exchequer  bills  was  looked  upon  as  an  antici- 
pation of  revenue.  But  instead  of  cashing  them  people 
agreed  to  receive  them  as  payment.  Instead  of  paying  a 
debt  to  the  Government,  a  debt  owed  by  it  was  canceled. 
But  this  had  hitherto  been  regarded  merely  as  a  tem- 
porary expedient.  Now  the  redemption  and  withdrawal 
of  the  bills  were  made  dependent  on  a  future  resolution  in 
Parliament,  which,  in  its  turn,  could  only  take  effect  on 
one  year's  notice  to  the  Bank  of  the  cessation  of  the  agree- 
ment. The  exchequer  bills  thus  became  a  permanent  cir- 
culating ynedium  in  the  country. 

The  Bank  of  England  continued  to  be  mainly  respon- 
sible for  their  circulation.  It  is  true  that  the  "trustees 
for  circulating  the  old  exchequer  bills  issued  anno  1697" 
continued  to  act,  but  they  were  apparently  chiefly  con- 
cerned with  the  cashing  of  the  remaining  bills  of  that 


104 


The     English     Banking     S  y  s  t  e 


ni 


date."'  In  1729  the  then  prosperous  South  Sea  Company 
undertook  the  circulation  of  about  one  milHon  for  seven 
years  without  allowance,  for  2d.  per  day  per  £100  (6  Geo. 
II,  c.  i).  But  it  collapsed  in  the  very  next  year  and  wa^ 
not  only  unable  to  maintain  the  bills  in  circulation,  but 
was  obliged  to  borrow  a  million  in  such  bills  from  the 
Government  (6  Geo,  II,  c.  10).  There  is,  however,  no 
sign  of  further  contracts  with  private  persons.  On  the 
contrary,  by  7  Anne,  c.  7  (1708),  the  Bank  was  again  en- 
trusted with  the  circulation  of  two  and  one-half  millions 
at  2d.  per  cent  per  day,  for  an  allowance  of  3  per  cent. 
The  arrangements  were  otherwise  the  same  as  in  1707. 
In  this  case,  too,  the  allowance  was  to  be  paid  in  exchequer 
bills  until  the  whole  debt  was  canceled.  That  of  1707 
was  never  canceled,  since  by  7  Anne,  c.  7,  it  was  con- 
verted into  a  funded  debt  to  the  Bank,  bearing  an  interest 
of  6  per  cent,  A  much-used  distinction  was  introduced 
by  the  last-named  act  between  nonspecie  bills,  which  had 
not  been  returned  to.  the  Exchequer  after  their  first  issue, 
and  specie  bills,  which  had  been  reissued  on  one  or  more 
occasions.  The  Bank  was  only  bound  to  cash  the  latter. 
This  distinction  was  removed  by  9  Anne,  c.  7,  and  the 
Bank  declared  itself  ready  to  cash  all  bills,  for  which 
purpose  a  fixed  yearly  payment  of  £45,000  was  granted 
to  it,  in  addition  to  the  allowance  of  3  per  cent,  until  the 
total  value  of  the  outstanding  bills  should  be  reduced  to 
£1,900,000.  To  secure  the  necessary  cash  the  Bank 
might  contract  loans  or  make  calls  on  its  shareholders, 

a  The  Londcm  Gazette,  1709,  No.  4537,  and  17 10,  No.  4684,  mentions 
this  in  connection  with  the  fifteenth  and  sixteenth,  respectively,  renewals 
of  their  contract.     Their  allowance  was  for  the  future  only  i  per  cent. 


National    Monetary     Commission 

and  might  issue  bank  notes  to  the  amount  of  the  received 
contributions  or  of  the  sums  agreed  in  the  contract,  in 
excess  of  the  amount  otherwise  allowable.  This  act  con- 
tained other  provisions  of  some  interest. 

For  instance,  exchequer  bills  for  small  sums  of  £6  5s. 
were  to  be  issued  for  the  convenience  of  trade,  but  besides 
these,  bills  of  £5,000  each,  not  exceeding  50  in  number, 
were  to  be  issued  for  transactions  between  the  Bank  and 
the  Exchequer.  These  bills  afterwards  played  an  impor- 
tant part  in  monetary  transactions.  The  Bank  now 
undertook  to  redeem  the  bills,  but  the  Treasury  was  still 
bound,  as  hitherto,  to  cash  them  on  demand,  and  a  special 
officer  was  appointed  in  the  Exchequer  to  pay  the  interest 
which  was  due.  Thus  the  Bank  and  the  Treasury,  respec- 
tively, were  under  similar  obligations  to  redeem  the  bills. 

The  arrangements  with  the  Bank  were  repeated  during 
the  rest  of  the  century,  whenever  a  fresh  issue  of  bills 
took  place.  But  tliese  new  agreements  established  no 
essentially  new  relationship.  The  only  changes  were  in 
the  amoimts  allowed  as  interest  on  the  capital  held  in  cash 
for  the  purpose  of  redemption,  and  in  the  rate  of  interest 
on  the  exchequer  bills  themselves.  This  was  naturally 
fixed  according  to  the  general  conditions  of  the  loan 
market,  and  had  no  influence  on  the  real  position  of  the 
exchequer  bills.  From  tliis  time  forward  throughout 
the  whole  century  they  remained  interest-bearing  govern- 
ment bills  which  were  legal  tender  as  payment  of  the 
public  taxes  and  were  redeemed  in  coin  on  demand. 

A  study  of  the  evolution  of  the  exchequer  bills  leads  to 
the  following  conclusions:  At  their  first  issue  in  1696  they 
were  negotiable  secvirities,  payable  on  demand,  without 

106 


The     English     Banking     S  y  s  t  e 


m 


other  guaranty  than  the  pubHc  credit  in  general.  In  the 
following  year  they  received  an  additional  guaranty,  in 
that  they  had  to  be  accepted  in  payment  of  taxes  by  any 
receiver  or  collector.  Their  security  was  increased  by  the 
appointment  of  an  association  to  cash  them.  Their  value 
now  rested  not  only  on  the  certainty  that  the  State  was 
obliged  to  receive  them  in  payment  of  taxes,  but  also  on 
the  fact  that  a  definite  amount  of  private  capital  was  set 
aside  for  their  redemption.  No  formal  change  was  made 
in  the  rights  of  the  holders  of  exchequer  bills  when  the 
Bank  undertook  the  duty  of  cashing  them.  But  it  was  not 
without  influence  on  their  value  that  the  Government,  in 
issuing  them,  was  no  longer  relying  on  the  success  of  a  sub- 
scription, but  could  reckon  on  the  support  of  a  powerful 
bank,  which  commanded  general  respect  and  possessed 
valuable  privileges.  Moreover,  the  Bank,  when  it  had 
once  undertaken  the  business,  had  no  motive  for  refusing 
it  subsequently,  since  it  received  the  additional  right  of  a 
voice  in  deciding  the  total  value  of  the  bills  issued.  The 
exchequer  bills  thus  acquired  for  the  public  the  same  value 
as  the  Bank's  own  notes,  while  they  served  as  a  bond 
between  the  State  and  the  Bank,  which  bound  the  two 
together  in  ever  closer  relations  through  regularly  repeated 
loans  and  contracts  and,  finally,  through  the  funding  of  the 
bills  into  a  permanent  debt  until  the  State  should  repay 
the  capital  needed  to  cash  them. 

The  value  which  the  bills  possessed  as  a  circulating  medium 
caused  them  to  be  regarded  as  money  even  when  first 
issued.  Thus  it  was  stated  in  Pegasus  of  August  24,  1696, 
that  the  exchequer  bills  "  will  fill  this  nation  full  of  money 
and  make  trade  flourish. "     Drake,  a  member  of  Parlia- 


107 


National     Monetary     Commission 

ment,  remarked  that  "They  created  money  without  Bul- 
lion, and  distributed  great  quantity  of  coin  without  help 
of  the  Mint. "  Parliament  was  especially  congratulated 
on  having  made  money.  It  had  "laid  a  good  foundation 
for  Paper  Money  to  supply  the  place  of  our  Silver  Coin. "" 
The  historians,  Tindal,  Smollett,  etc.,  credit  it  with  this. 
But  there  were  not  wanting  expressions  of  contemporar}^ 
opinion  which  estimated  such  beliefs  at  their  true  value. 
The  exchequer  bills  had  never  had  a  forced  currency,  their 
acceptance  in  private  business  was  voluntary  and  depended 
on  the  confidence  felt  in  their  convertibility.  An  anony- 
;mous  pamphlet  written  in  1 710  on  the  nature  and  use  of 
I  money  and  paper  credit  ^  combated  the  notion  that  the 
^  Government  could  create  money  by  its  bills.  These  could 
be  nothing  but  promises  to  pay  money,  and  their  worth 
resulted  only  from  the  fact  that  trade  required  much  less 
money  than  was  generally  believed.  The  Dutch  "  lock  up 
the  great  bulk  of  their  money  in  the  Bank  of  Amsterdam, 
and  make  their  payments  by  transferring  from  one  man's 
accoimt  to  another  in  the  Bank's  books,  so  that  in  propor- 
tion to  their  vast  dealing  there  is  nowhere  so  small  an 
appearance  of  money  in  specie  as  in  the  greatest  trading 
coimtry  in  the  world.  "  The  exchequer  bills  were  valuable 
because  they  effected  a  useful  saving  of  specie.  For  this 
reason  the  Government  should  avoid  any  disturbance  of 
the  confidence  felt  in  these  bills,  otherwise  the  demand  for 
actual  coin  would  again  make  itself  felt. 

,  "  "A  Short  History  of  the  Last  Parliament,"  London,  1699. 
J  Ö  "A  Vindication  of  the  Faults  on  both  Sides  with  a  Dissertation  on  the 
feature  and  Use  of  Money  and  Paper  Credit  in  Trade,"  17 10.     It  is  a  vindi- 
cation of  a  pamphlet  published  earlier  which  attacked  both  Whigs  and 
Tories  (Somers's  Tracts,  Vol.  XIII). 


108 


The     English     Banking     System 

As  a  matter  of  fact  the  English  Government  always 
regarded  the  exchequer  bills  as  paper  credit  used  as  cir- 
culating medium,  whose  value  depended  on  the  confidence 
in  their  convertibility,  and  it  was  always  careful  to  secure 
this  convertibility.  No  attempt  was  ever  made  to  force 
exchequer  bills  upon  the  public  creditors.  Thus  in  1697 
the  Lords  of  the  Treasury  pointed  out  to  the  collectors 
of  the  excise  in  the  country  that  the  bills  which  they 
procured  in  order  to  remit  the  receipts  from  the  excise 
duties  to  London  must  not  be  exchequer  bills,  since  the 
creditors  of  the  excise  who  must  be  paid  with  the  remit- 
tances could  not  be  forced  to  accept  such  bills.^^ 

The  exchequer  bills  fully  served  their  purposes  as  a  cir- 
culating medium,  and  the  loans  which  the  Government 
raised  on  critical  occasions  by  means  of  these  bills  are  a 
proof  that  they  were  voluntarily  and  freely  accepted  in 
commerce  on  all  sorts  of  occasions.  It  has  already  been 
noted  that  in  1720  the  Government  assisted  the  South  Sea 
Company  by  the  advance  of  a  million  in  bills  in  order  to 
enable   it   to   resume   its   payments.     Similarly   in    1793 

o  Treasury  Papers,  1697,  Vol.  XLV,  May  4. 

0  This  procedure  shows  the  superior  foresight  and  prudence  of  the 
English  financial  administration  as  compared  with  the  French.  The  notes 
issued  by  the  Banque  Royale  (17 18),  for  which,  as  is  well  known,  all  the 
outstanding  government  debts  were  exchanged,  had,  when  first  issued,  a 
value  only  for  the  State,  since  only  the  "bureaux  de  recette  du  roi"  were 
obliged  to  accept  them.  But  soon  these  became  forced  currency  in  com- 
mercial transactions  and  "enfin  les  billets  de  banque  eurent  cours  dans 
tous  les  payements  qui  se  faisaient  au  public,  soit  par  le  ministfere  des 
notaires,  soit  pour  les  remboursements  que  les  debiteurs  voulaient  faire 
ä  leurs  creanciers. "  Cf.  "Histoire  generale  et  particuli^re  du  visa  fait 
en  France  pour  la  reduction  et  I'extinction  de  tous  les  papiers  royaux," 
Paris,  1743,  I,  p.  19.  A  forced  currency  was  in  Law's  opinion  indispen- 
sable to  the  successful  development  of  a  paper  currency.  Cf.  Law,  "Con- 
siderations sur  le  commerce  et  sur  I'argent,"  1720,  C.  VII,  p.  135. 


109 


National    Monetary     Commission 

Parliament  agreed  to  issue  £5,000,000  in  exchequer  bills 
to  assist  the  stagnant  trade."  £2,202,000  was  lent  to 
the  London  merchants,  Manchester  received  £25,000, 
Liverpool  £130,000,  and  Bristol  £40,000.  This  made  up 
the  total  issued.  The  bills  bore  an  interest  of  2^26..  per 
day,  but  the  borrowers  paid  a  higher  rate  to  the  Govern- 
ment, as  the  South  Sea  Company  had  done.  On  the 
present  occasion  the  rate  was  4  per  cent;  on  the  former 
occasion,  5  per  cent. 

The  exchequer  bills  were  a  wholly  distinct  type  of  debt. 
Each  bill  was  warrant  for  a  legal,  actionable  claim  on  the 
Government  to  receive  the  said  bill  in  payment  of  taxes, 
to  pay  the  interest  thereon,  and  ultimately  to  cash  it,  and 
for  a  similar  claim  on  the  Bank  to  cash  it  for  the  amount 
stated  plus  the  interest  due.  The  total  issue  of  the  bills 
involved  at  the  same  time  a  government  debt  to  the 
Bank  equal  in  value  to  the  issued  bills.  This  debt  was 
not  legally  reduced  by  the  conversion  of  the  bills  at  the 
Exchequer,  since  its  repayment  was  only  possible  after  a 
year's  notice.  Such  conversion  merely  resulted  in  a 
counterclaim  on  the  Bank,  which  was  obliged  to  cash 
the  bills  presented  to  it  by  the  Exchequer.  Hence  from 
the  financial  standpoint  the  bills  were  circulating  share 
certificates  in  a  public  debt  to  the  Bank,  which,  when 
cashed  by  the  Bank,  were  retained  by  it,  but  when  cashed 
by  the  State  gave  rise  to  a  counter  claim. 

The  bills  acquired  a  special  significance,  because  from  the 
time  of  George  II  onward  the  Government,  with  the 
consent  of  Parliament,  used  them  every  year  to  anticipate 

o  [This  is  a  misconception.     The  issue  was  made  to  allay  panic  arising 
from  excessive  expansion  of  credit,  etc.     H.  S.  F.] 


The     English     Banking     System 

the  land  and  malt  taxes,  and  they  thus  became  the  basis 
of  the  credit  allowed  by  the  Bank  to  Government  for 
the  purposes  of  current  expenditure. 

This  circumstance,  combined  with  the  other  relations 
between  the  Bank  and  the  Government  which  arose  out 
of  the  exchequer  bills  and  which  we  have  just  described, 
was  the  chief  ground  for  that  confidence  vv^hich  the  Gov- 
ernment must  have  felt  in  the  Bank  in  order  to  intrust 
to  it  the  administration  of  the  whole  of  the  public  debt. 
For  in  this  matter  the  Bank  had  to  overcome  the  compe- 
tition of  the  two  other  companies  with  which  it  shared  the 
administration  during  the  eighteenth  century. 

C.  The  administration  of  the  national  debt  by  the  companies. 

I.   THE    DISTINCT    CHARACTERS    OF    THE    COMPANIES. 

A  comparison  of  the  legal  constitutions  of  the  three 
companies  shows  a  striking  similarity  in  their  positions 
at  law.  In  each  case  the  capital  stock  consists  of  a  public 
debt  which  was  only  redeemable  after  a  certain  notice; 
no  increase  in  this  can  be  made  without  the  consent  of 
Parliament;  the  said  capital  forms  a  joint  stock  the 
shares  in  which  are  transferable  in  a  similar  manner  in 
each  case;  they  are  alike  exempt  from  taxes;  the  pay- 
ment of  the  interest  on  them  by  the  Government  is 
similarly  managed;  each  has  a  monopoly  in  its  own 
particular  sphere  of  activity.  The  varying  relations  of 
the  companies  to  the  Government  must  consequently 
arise  from  the  differences  in  these  spheres  of  activity,  and 
in  this  respect  the  Bank  at  once  stands  out  as  distinct 
from  the  other  two  companies.     The  trading  privileges 


III 


National    Monetary     Commission 

of  the  two  latter  contrast  with  the  banking  privileges  of 
the  former,  banking  privileges  which  were  so  carefully 
protected  when  the  other  two  companies  were  founded. 
This  contrast  led  to  a  fundamental  distinction  in  their 
respective  relations  to  the  Treasury.  We  have  already 
seen  what  an  influence  the  Bank  was  destined  to 
exercise  on  the  management  of  the  public  money  through 
its  responsibility  for  the  exchequer  bills  and  its  opera- 
tions with  respect  to  the  various  government  bills.  The 
two  others  could  not  advance  so  far.  The  Bank  exerted 
a  continual  influence  on  public  credit,  though  its  current 
business;  and,  in  fact,  its  own  credit  became  closely  bound 
up  with  that  of  the  Government,  owing  to  the  exchequer 
bills  contract.  The  East  India  Company  and  the  South 
Sea  Company,  on  the  other  hand,  could  only  assist  public 
credit  in  isolated  cases  and  in  a  restricted  manner. 

The  two  companies  were  not,  however,  on  an  equal 
footing  in  this  matter.  The  East  India  Company  had 
from  the  first  made  vigorous  use  of  its  trading  privileges 
and  had  carried  out  a  consistent  and  successful  policy,  so 
that  its  fortunes  supply  an  important  chapter  in  English 
commercial  history.  It  did  not,  however,  concern  itself 
with  the  financial  business  of  the  State  more  than  its  loan 
transactions  with  the  Government  demanded.  It  was 
different  with  the  South  Sea  Company.  This  company 
traded  only  in  two  localities.  In  1713,  by  the  peace  of 
Utrecht,  it  secured  the  trading  privileges  of  the  French 
Guinea  Company,  which  had  to  provide  the  Spanish  pos- 
sessions in  America  w4th  4,800  negroes  a  year  and  to 
dispatch  thither  yearly  a  ship  of  650  tons.     In  1724  it 


The     English     Banking     System 

took  over  the  whole  fishing  and  trade  of  the  Greenland 
Company.«  Both  enterprises  resulted  in  a  loss,  in  the 
latter  case  of  £237,000  in  eight  voyages. 

In  1748  the  company  gave  up  the  contract  with  Spain 
and  after  this  carried  on  no  trade  whatever.''  Thencefor- 
ward it  concerned  itself  still  more  with  financial  transac- 
tions, in  which  it  was  already  a  dangerous  rival  to  the  Bank 
of  England.  The  trading  companies  could  not  legally  carry 
on  banking  business  proper,  so  that  these  financial  trans- 
actions were  only  made  possible  by  turning  its  capital 
stock  to  account.  This  consisted  of  a  government  debt; 
and  the  increased  business  of  the  South  Sea  Company,  and 
in  certain  cases  also  of  the  East  India  Company,  resulted 
from  an  increase  in  their  capital  by  loans  to  the  State  or 
by  incorporating  existing  public  debts  in  the  original  fund. 
Hence  their  share  in  the  administration  of  the  public  debt 
consisted  in  the  management  of  individual  government 
loans.  Before  we  pass  on  to  examine  the  nature  of  this 
management  and  to  determine  the  importance  acquired 
by  the  different  companies  therefrom  we  must  briefly  sur- 
vey the  general  development  of  the  forms  of  debt  during 
the  eighteenth  century. 

2.  THE  DEVELOPMENT  OF  THE  FORMS  OF  DEBT. 

In  spite  of  the  free  use  made  during  the  reigns  of  William 
and  of  Anne  of  the  sources  of  credit  opened  up  by  the  erec- 
tion of  companies  and  the  issue  of  exchequer  bills  the 
national  expenditure  continued  to  increase,  and  more 
especially  in  consequence  of  the  war  with  France  and 

o  Founded  by  4  Will,  and  Mary,  c.  17,  without  financial  connection  with 
the  State. 

^  S.  Fairman,  loc.  cit.,  pp.  97-98. 

68299° — II 8  113 


National    Monetary     Commission 

Spain.  England,  indeed,  enjoyed  only  five  years  of  peace 
between  the  foundation  of  the  Bank  in  1694  and  the  death 
of  Anne  in  1713.  Hence  the  system  of  anticipations  and 
of  deferred  payments  did  not  cease  with  any  of  the  great 
loans.  We  have  already  seen  that  the  South  Sea  Com- 
pany was  founded  in  order  to  free  the  public  finances 
from  a  heavy  burden  of  short  date  bills.  Tallies  of  pro, 
navy,  victualing,  and  transport  bills,  army  and  ordnance 
debentures  were  still  used  in  the  English  financial  system, 
side  by  side  with  the  exchequer  bills,  as  methods  of  obtain- 
ing credit.  The  tallies  of  pro  did  not  disappear  till 
toward  the  end  of  the  eighteenth  century.«  They  were 
then  replaced  partly  by  the  more  convenient  exchequer 
bills,  which  were  now  in  regular  circulation,  and  partly 
by  the  loan  debentures,  a  new  form  of  debt  introduced 
in  1 731  by    5  Geo.  II,  c.  2. 

The  army  and  ordnance  debentures,  which  must  not  be 
confused  with  the  loan  debentures,  and  the  navy  and  ord- 
nance bills  remained  in  constant  use.  The  issue  of  deben- 
tiwes  had  been  legalized  by  Parliament  several  times,  but 
they  continued  to  be  used  only  for  the  army  and  the  com- 
missariat departments,  just  as  the  navy  and  other  bills 
were  confined  to  payments  of  the  navy  and  of  the  trans- 
port departments.  These  debentures  and  bills  acquire  a 
different  character  as  soon  as,  under  William  and  Anne, 
the  appropriation  of  the  supplies  voted  came  to  be  deter- 

0  Tallies  of  pro  are  mentioned  for  the  last  time  in  the  public  accounts 
for  1729  (Ret.  on  Public  Income,  etc.,  I,  p.  80).  But  the  anticipations  of 
the  land  and  malt  tax  by  exchequer  bills  and  by  "loans  in  anticipation  of 
duties"  continue  to  appear  in  these  accounts  until  1762.  It  is  not  clear 
whether  this  distinction  rests  on  the  difference  between  exchequer  bills 
and  tallies  or  on  that  between  the  land  tax  and  other  duties. 


114 


The     English     Banking     System 

mined  by  Parliament,  and  the  necessity  of  presenting 
accounts  demanded  careful  organization  in  each  depart- 
ment. So  long  as  there  had  been  no  legal  distinction  or 
division  made  between  the  issues,  each  debt  incurred  by 
any  department  of  Government  was  a  debt  on. the  whole 
Government,  with  which  the  department  borrowing  the 
money  was  only  especially  concerned  in  that  the  sum  was 
repaid  through  it.  But  when  a  definite  sum  was  appro- 
priated every  year  for  each  branch  of  expenditure  which 
came  under  parliamentary  control,  as  for  instance  for  the 
army  and  navy,  the  issue  of  debentures  and  bills,  which 
were  essentially  short  date  bills  of  exchange,  became  a 
method  of  using  credit  for  which  each  department  was 
responsible  to  its  own  creditors.  This  credit  must  not 
exceed  the  total  amount  voted  to  each  department  for  the 
year,  it  must  be  covered  by  this  amount.  We  have  seen 
in  reference  to  the  act  founding  the  South  Sea  Company 
that  Parliament  itself  insisted  on  a  strict  classification  of 
the  expenditure.  This  was  carried  out  to  a  still  greater 
extent  by  the  Ministry,  so  that  at  the  end  of  the  financial 
year  there  was  generally  a  considerable  sum  outstanding 
in  the  form  of  such  debts  as  were  due  to  the  employment  of 
credit.  The  next  Parliament  had  either  to  provide  means 
for  this  repayment  or  to  have  it  funded.  These  forms  of 
debt  did  not  disappear  until  a  new  method  of  using  credit 
was  provided,  when  the  different  public  departments  ceased 
to  manage  their  money  independently,  and  a  connection 
was  established  between  the  financial  system  and  the  Bank. 
The  funding  of  debt  led  to  a  distinction  between  ex- 
chequer bills  and  the  other  kinds  of  floating  debts.  The 
exchequer  bills,  as  has  been  already  explained,  were  based 


"5 


National    Monetary     Commission 

upon  a  government  debt  to  the  Bank,  and  their  funding 
consisted  in  a  statement  that  this  debt  would  not  be  repaid, 
so  that  they  became  a  permanent  interest-bearing  debt 
to  the  Bank.  The  other  unfunded  debts  were  either 
transformed  into  additions  to  the  capital  stock  of  the 
companies,  which  result  was  brought  about  by  means  of 
a  subscription,  or  into  an  independent  interest-bearing 
debt.  In  the  latter  case  the  Government,  either  directly 
or  through  the  intermediacy  of  the  companies,  allowed  a 
fixed  annuity  in  return  for  the  payment  of  a  certain  sum 
in  such  unfunded  bills.  The  development  of  the  annuity 
debt  was  the  basis  of  both  forms  of  consolidation,  since 
they  created  no  independent  type  of  government  debt, 
but  consisted  merely  in  the  transfonnation  of  one  type 
into  another.'^ 

The  annuity  debts  were  either  terminable  or  not.  The 
limit  was  either  the  life  of  the  annuity  holder  (of  which 
form  of  annuity  debt  the  tontine  was  a  variation),  or  a 
date  previously  fixed.  Hence  were  distinguished:  Life 
annuities,  tontine  annuities,  terminable  annuities,  and 
permanent  annuities. 

Mention  has  already  been  made  of  the  first  tontine  and 
its  reception.  A  second  attempt  was  made  in  1765. 
Navy,  victualing,  and  transport  bills  were  to  be  funded 
by  means  of  a  tontine.  Six  classes  were  made,  each  with 
a  capital  of  £50,000,  every  £100  of  which  was  entitled 

«The  following  account  is  based  mainly  upon  the  Return  on  Public 
Income  and  Expenditure  and  upon  the  information  given  in  the  different 
loan  acts,  in  so  far  as  these  introduced  entirely  novel  types  of  public  debt. 
An  analysis,  based  upon  this  Return,  of  the  English  national  debt  from 
i68g  until  the  i)resent  time,  is  given  by  Leroy-Beaulieu,  "Traitd  de  la 
science  de  finances,"  Paris,  1877,  Vol.  II.  Bk.  II,  ch.  v.  to  viii.  For  the 
increase  in  amount  see  ch.  XII. 

116 


The     English     Banking     System 

to  an  interest  of  3  per  cent  per  annum.  Within  each  class 
the  payments  due  to  those  annuitants  who  died  were 
divided  amongst  the  survivors.  This  division  into  six 
classes  according  to  the  age  of  the  annuitants  was  repeated 
in  the  last  tontine  in  1789.  The  annuities  of  the  deceased 
members  were  divided  amongst  the  survivors  until  each 
of  these  secured  the  sum  of  £1,000.  The  shares  were 
£100  and  were  entitled  to  £4  3s.  interest  in  the  first  (the 
youngest)  class,  and  to  £5  12s.  in  the  sixth  (the  eldest) 
class. 

The  life  annuities,  which  became  important  in  the 
nineteenth  centru'y  in  connection  with  the  sinking  fund, 
at  first  occurred  very  rarely  as  an  independent  form  of 
debt.  Three  such  loans  were  raised  in  1694,  one  in  1696, 
and  one  in  1704.  The  principle  is  the  same  in  all  cases. 
An  interest  at  so  much  per  cent  was  allowed  on  payment 
of  a  fixed  sum,  £100,  which  interest  decreased  from  14  to 
12  and  to  10  per  cent,  according  to  whether  the  purchase 
was  made  for  one,  two  or  three  lives.  The  rarity  of  this 
type  of  debt  was  due  to  the  fact  that  the  State  had  to 
devote  a  large  sum  to  the  payment  of  the  yearly  annuity, 
owing  to  the  necessity  of  paying  back  the  borrowed  capital. 
This  obligation  to  repay  in  the  present  was  avoided  in  the 
case  of  the  terminable  and  permanent  annuities. 

Although  the  terminable  annuities  were  arranged  so  as 
to  repay  the  capital  advanced,  the  repayment  was  under 
the  control  of  the  Government  and  was  generally  spread 
over  so  long  a  period  that  the  burden  was  not  unduly 
heavy.  Loans  in  the  form  of  terminable  annuities  and 
anticipations  were  the  regular  forms  until  171 5.  At  this 
date  ten  such  loans  were  raised  by  the  sale  of  annuities 


IT7 


National     Monetary     Commission 

for  89,  94,  99,  and,  in  one  case  only,  for  32  years.  The 
principle  upon  which  this  sale  was  based  was  that  a  lower 
or  higher  annuity  was  allowed  for  the  payment  of  the 
same  amount  of  capital,  according  to  whether  the  annuity 
continued  for  a  longer  or  shorter  period  of  years,  so  that 
the  capital  itself  was  repaid  through  the  annuities. 
They  thus  differed  from  the  life  annuities  only  in  the  one 
point,  viz,  that  in  the  latter  the  duration  of  the  payment 
was  undetermined,  whilst  in  the  former  it  was  decided  in 
advance.  The  terms  long  annuities  and  short  annuities 
were  used  according  to  whether  the  payments  were  spread 
over  a  long  or  short  period. 

After  1 76 1  they  became  more  frequent  again,  but  in 
connection  with  permanent  annuities  and  lotteries  and 
not  independently. 

The  permanent  annuities  were  by  far  the  most  impor- 
tant of  the  English  public  debts.  The  first  which  was 
created,  with  the  exception  of  the  bankers'  debt,  was  the 
government  debt  to  the  three  companies.  In  1715  the 
State  for  the  first  time  made  a  similar  arrangement  with 
private  creditors.  By  i  Geo.  I,  c.  19  and  21,  £1,079,000 
was  raised  by  a  subscription  loan,  and  £5  per  annum  was 
to  be  allowed  on  every  £100  until  the  capital  had  been 
repaid.  In  the  permanent  annuities  the  possible  repay- 
ment of  the  capital  was  not  ruled  out,  but  it  was  not  pro- 
vided for  in  borrowing  the  money,  whereas  in  the  other 
forms  of  debt  accoimt  was  taken  in  determining  the 
annuities  of  the  repayment  of  the  capital  involved. 
\^arious  attempts  were  made  in  the  course  of  the  century 
to  repay  the  capital  debt  incurred  through  the  perma- 
nent annuities;  an  account  of  these  attempts  forms  the 


118 


The     English     B  a  n  k  i  n  g-     System 

history  of  the  different  funds  (general,  sinking,  aggregate, 
consoHdated,  and  new  sinking  fund).  The  proceeds  of 
certain  taxes  were  appropriated  to  the  payment  of  the 
other  annuities  at  their  foundation.  On  this  difference 
rests  the  distinction  between  redeemable  and  irredeem- 
able annuities,  which  are  not  new  types  of  debt,  but  only 
distinct  names  given  to  the  debt  according  to  the  nature 
of  the  public  obligation  involved.  In  the  case  of  the 
redeemable  annuities  the  State  owed  the  capital  and  a 
yearly  interest,  but  was  only  bound  to  pay  the  latter;  in 
the  case  of  the  irredeemable  annuities  the  State  owed  a 
yearly  interest  for  a  certam  time.  To  the  former  class 
belong  the  government  debt  to  the  companies  and  the 
permanent  annuities;  to  the  latter  the  life,  tontine,  and 
terminable  annuities. 

The  yearly  payment  of  the  permanent  annuities,  since 
the  capital  debt  existed  apart  from  them,  corresponded  to 
the  interest  on  the  capital  lent  to  the  Government;  hence 
it  was  based  on  varying  agreements,  and  might  be  changed 
even  in  regard  to  a  particular  loan  transaction.  The 
Government  had  the  right  to  repay  the  capital  though  it 
was  not  obliged  to  do  so.  Hence  it  could  always  dis- 
solve its  contract  with  a  creditor  who  would  not  agree  to  a 
change  of  interest.  Such  a  conversion  of  the  yearly  pay- 
ment was  not  so  simple  in  the  case  of  the  irredeemable 
annuities,  for  here  the  consent  of  the  creditor  was  indispen- 
sable. 

The  determination  of  the  rate  of  interest  in  the  case  of 
the  permanent  annuities  naturally  depended  upon  the 
state  of  public  credit.  In  the  first  of  such  loans  the  amount 
of  the  yearly  interest  to  be  paid  was  fixed  at  so  much  per 


119 


National     Monetary     Commission 

cent  on  the  total  capital  paid  in,  and  a  proportional  pay- 
ment was  made  on  every  £ioo.  From  the  time  of 
George  II  onward  it  was  usual  to  fix  the  rate  of  interest 
equally  low  (3,  3 >^,  or  4  per  cent)  whatever  the  state  of  the 
public  credit.  Hence  "  this  interest  was  not  paid  on  the 
actual  capital  of  the  creditor  but  was  reckoned  on  a 
nominal  capital  allotted  to  him.  Thus  stocks  were 
established,  the  first  occasion  being  in  1747  by  20  Geo.  II, 
c.  3,  viz,  shares  in  a  funded  public  debt,  which  shares  bore 
a  fixed  low  rate  of  interest.  When  the  Government 
wished  to  borrow  a  certain  sum,  for  example,  £4,000,000 
in  1747,  it  offered  stocks  which  bore  a  certain  fixed  interest 
on  every  £100,  in  this  case  4  per  cent.  Thus  it  was  not 
the  interest  but  the  price  of  the  stock  which  had  to  be 
agreed  upon  between  the  State  and  the  lender.  If  the 
interest  corresponded  to  the  public  credit,  the  stocks  were 
bought  at  par;  if  the  interest  were  too  low,  less  was  paid 
for  stock  of  the  nominal  value  of  £100,  i.  e.,  the  Govern- 
ment had  to  issue  more  stocks  in  order  to  secure  the 
desired  amount;  in  1747,  £4,400,000  had  to  be  issued 
instead  of  £4,000,000,  and  consequently  £176,000  had  to 
be  paid  yearly  as  interest  instead  of  £160,000,  i.  e.,  about 
4J^  per  cent.  This  type  of  loan  made  borrowing  easier, 
since  it  opened  the  door  to  speculation,  and  although  it 
was  frequently  abandoned  later  on,  in  order  to  avoid  so 
large  an  increase  in  the  national  debt,  it  was  always 
adopted  again  in  times  of  bad  credit,  for  example,  at  the 
time  of  the  American  war. 

Lotteries  were  a  very  frequent   method  of  obtaining 
money.     They  fall  into  two  classes :  during  the  first  period 

oCf.  Wilson,  "The  National  Budget,"  London,  1882,  p.  25,  et  seq. 


The     English     Banking     System 

they  served  only  as  temporary  means  of  raising  money 
without  bringing  any  profit  to  the  State;  during  the  sec- 
ond they  were  used  as  an  extra  source  of  revenue.  The 
turning  point  is  marked  by  28  Geo.  II,  c.  15,  by  which 
£900,000  of  3  per  cent  stocks  were  issued  in  a  lottery  of 
100,000  tickets  at  £10,  so  that  the  Government  made  a 
profit  of  £100,000.  The  first  of  the  ten  lotteries  which 
occurred  during  this  period  has  already  been  mentioned. 
The  remaining  nine  occurred  between  1710  andiyiQ.  In 
all  cases  the  capital  was  to  be  repaid  in  thirty-two  years. 
Only  the  two  first,  however,  were  arranged  on  the  principle 
of  drawing  lots  for  annuities  (8  Anne,  c.  4,  and  9  Anne,  c.  6) . 
The  five  following  were  so  arranged  that  the  fortunate 
tickets  did  not  carry  with  them  a  higher  annuity  but  a 
capital  sum  which  was  added  to  that  paid  (£10  on  £100). 
The  total  capital  debt,  as  increased  by  the  lottery,  bore 
the  same  rate  of  interest  and  was  paid  back  in  course  of 
time,  so  that  those  who  did  not  win  had  a  claim  to  the 
interest  on  the  sum  they  had  subscribed  and  to  its  repay- 
ment, w^hile  the  winners  had  the  interest  on  the  sum  sub- 
scribed and  on  that  won,  and  a  claim  to  the  repa3mient  of 
both.  The  two  last  lotteries  (5  Geo.  I,  c.  3  and  c.  9) 
differ  in  that  the  drawers  of  blanks  lost  all  claim  while 
the  fortunate  tickets  carried  with  them  proportionately 
higher  winnings.  Hence  the  price  of  tickets  for  these  two 
lotteries  was  reduced  to  £3.  In  1769,  under  Tord  North, 
the  prizes  were  for  the  first  time  paid  in  cash,  and  subse- 
quently, until  1824,  the  lottery  served  not  only  as  an  inde- 
pendent source  of  revenue,  but  as  a  method  of  anticipating 
the  year's  receipts.  Lotteries  were  connected  with  the 
annuity  loans  at  the  time  of  the  seven  years'  war  and 


National    M  o  n  ea  t  r  y     Com  m  is  s  to  n 

again  during  the  American  war,  being  used  to  facilitate  the 
conversion,  repayment,  and  borrowing  of  those  loans. 
Those  who  agreed  to  the  reduction  of  interest  or  to  the 
repayment  of  the  capital  debt  at  less  than  the  nominal 
value  of  the  stock  received  premiums  in  the  form  of  lot- 
tery tickets,  the  disproportionate  gains  on  which  were 
attractive,  while  their  payment  laid  no  serious  burden  on 
the  Government.  Thus  by  lo  Geo.  Ill,  c.  46,  two  and 
one-half  millions  of  4  per  cent  annuities  were  converted  into 
3  per  cents,  and  by  14  Geo.  Ill,  c.  76,  it  was  made  possible 
to  redeem  a  million  of  3  per  cent  stock  in  such  a  way  that 
only  £88  was  paid  on  every  £100  share.  The  raising  of 
loans  in  stocks  was  thus  made  less  expensive :  people  either 
drew  lots  for  the  amount  in  stock  or — and  this  was  the 
method  of  procedure  usual  during  the  American  war — ob- 
tained for  a  given  sum  of  money  a  somewhat  lower  sum  in 
stocks  and  a  lottery  ticket.  This  ticket,  if  successful,  en- 
titled the  possessor  either  to  a  prize  in  money  or  to  an 
equivalent  amount  in  stocks,  or  to  an  annuity.  The  annu- 
ity lasted  either  for  life,  or  for  ninety-nine  years,  or  for  a 
shorter  time,  and  differed  in  amount  accordingly.  Stocks 
were  issued  in  this  way  in  almost  every  year  between  1758 
and  1784. 

Toward  the  end  of  the  eighteenth  century  a  plan  fre- 
quently adopted  was  to  issue  stocks  in  connection  with 
separate  annuities.  In  1757,  by  30  Geo.  II,  c.  19,  £3,000,- 
000  of  stock  was  issued,  every  £100  of  which  entitled  the 
holder  to  a  life  annuity  of  £1  2s.  6d.  In  1762,  by  2  Geo. 
Ill,  c.  10,  £12,000,000  w^ere  issued  in  such  a  way  that 
every  £100  purchased  £80  of  4  per  cent  stock,  which  was 
to  be  converted  into  3  per  cents  in  nineteen  years,  and 


The     English     Banking     System 

which  was  combined  with  an  annuity  of  £i  for  ninety- 
eight  years.  During  the  concluding  years  of  the  century 
such  compHcated  devices  were  the  usual  methods  of 
raising  loans. 

3.    THE    CONNECTION    BETWEEN     THE    COMPANIES    AND     THE     MANAGEMENT 
OP   THE   PUBLIC   DEBT. 

The  connections  possible  between  the  three  companies 
and  a  public  debt  of  the  character  described  were  three- 
fold. They  might  become  creditors  of  the  State  through 
the  purchase  of  government  bills,  or  by  making  loans  to 
it  direct;  they  might  take  over  a  government  liability, 
making  under  certain  conditions  a  debt  to  themselves  out 
of  a  public  debt  already  existing;  or  they  might  undertake 
on  commission  to  advance  the  subscriptions  to  a  public 
loan,  to  pay  the  yearly  interest  owed  by  the  Government 
or  to  repay  the  capital.  It  is  this  third  proceeding  which 
is  generally  meant  when  reference  is  made  to  the  manage- 
ment of  the  English  national  debt  by  the  Bank.  But 
throughout  the  eighteenth  and  during  a  part  of  the 
ninteenth  centuries  this  connection  between  a  private 
company  and  the  Government  was  not  confined  to  the 
Bank;  nor  was  the  share  taken  by  the  companies  in  the 
management  of  the  debt  restricted  to  acting  as  inter- 
mediaries between  other  creditors  and  the  States.  The 
debts  to  the  company  itself  were  not  to  be  distinguished 
from  other  debts,  and  the  duties  which  it  undertook — 
of  dividing  amongst  the  individual  shareholders  the  sum 
paid  by  the  State  as  interest  on  the  total  debt,  or  of 
increasing  this  total  debt  by  a  loan  to  the  State — were 
the  same  as  those  undertaken  in  its  administration  of 


National     Monetary     Commission} 

the  other  Government  debts.  External  distinctions — 
such  as,  for  example,  the  duty  of  presenting  accounts  with 
regard  to  its  expenditure  on  the  management  of  the  debt — 
appeared  only  in  the  eighteenth  century,  and  were  never 
consistently  maintained.  Hence,  in  speaking  of  the 
administration  of  the  English  national  debt  by  the  com- 
panies, the  debts  to  the  companies  themselves  must  not 
be  excluded  but  must  rather  be  regarded  as  the  essential 
starting  point  upon  which  all  further  connections  between 
the  companies  and  the  Government  were  based.  It  was 
stated  in  a  report  of  the  House  of  Lords  of  June  2,  1733, 
that  nearly  the  whole  debt  of  the  Kingdom  was  incor- 
porated in  the  three  great  companies.  At  that  time  the 
Government  owed  over  forty-two  millions  to  the  com- 
panies, of  which  twenty-nine  millions  was  owing  to  the 
South  Sea  Company  alone.  The  companies,  in  administer- 
ing their  capital  stock,  thus  administered  nearly  the  whole 
of  the  national  debt ;  and  when  in  addition  they  acted 
as  intermediaries  between  the  Government  and  other 
creditors  they  were  only  performing  a  function  which  they 
had  already  performed  for  their  own  shareholders  for  a 
long  time  previously. 

Two  questions  must  thus  be  discussed  in  a  study  of  the 
relations  of  the  companies  to  the  system  of  public  debt. 
Firstly,  how  did  the  company  itself  regard  the  public 
debt  ?  And  here  account  must  be  taken  both  of  the  debt 
due  to  a  loan  from  the  company,  and  of  that  resulting 
from  a  transference  to  the  company  of  debts  belonging 
to  other  public  creditors.  Secondly,  what  share  had  the 
companies  in  the  management  of  government  debts  to 
other  creditors? 


124 


The     English     Banking     System 

(a)  The  East  India  Company. — The  least  important  part 
in  this  matter  was  played  by  the  East  India  Company. 
With  the  exception  of  the  sum  of  £3,200,000  at  5  per  cent 
owed  to  it  since  1703,  it  made  only  one  loan  to  the  State, 
namely,  one  milUon  at  3  per  cent  in  1744,  on  the  renewal 
of  its  charter  by  17  Geo.  II,  c.  17,  In  1755  the  interest 
on  the  first  debt  was  reduced  to  3  per  cent,  and  in  1 793  (33 
Geo.  Ill,  c.  47)  the  whole  debt  of  £4,200,000  was  com- 
bined with  the  so-called  3  per  cent  reduced  annuities 
payable  by  the  Bank  into  a  single  fund  under  the  adminis- 
tration of  the  Bank.  The  capital  stock  of  the  company 
had  grown  by  this  time  to  seven  millions,  tlirough  in- 
creased subscriptions,  but  its  financial  position  had  been 
uncertain  since  1773,  when  it  had  been  obliged  for  the  first 
time  to  borrow  from  the  Government.  The  conversion 
of  that  part  of  its  capital  which  consisted  of  a  public 
debt  into  a  property  in  stocks  which  could  be  freely  dis- 
posed of,  permitted  greater  flexibility  in  its  financial 
transactions.  The  history  of  this  and  of  its  other  financial 
relations  to  the  State  (payments  into  the  Exchequer, 
the  raising  of  loans)  do  not  concern  us  here.  The  East 
India  Company  is  of  comparatively  small  interest  in  a 
study  of  administration  of  the  English  pubHc  debt. 

(b)  The  South  Sea  Company. — A  much  more  note- 
worthy part  was  played  by  the  South  Sea  Company, 
which  grew  to  such  importance  during  the  first  ten  years 
of  its  existence  that  the  Bank  of  England  sank  into  the 
background  in  comparison. 

In  1 714,  that  is,  only  three  years  after  its  foundation, 
a  sum  of  £822,032,  consisting  of  arrears  of  interest  due  to 
the  company  and  a  government  unfunded  debt,  was  incor- 


125 


National    Monetary     Commission 

porated  by  a  corresponding  increase  in  the  company's 
capital  stock  by  i  Geo.  I,  c.  21.  The  latter  now  amounted 
to  ten  millions,  on  which  a  yearly  interest,  reduced  in 
1 71 6  to  5  per  cent,  was  paid  by  the  Government.  In 
1 7 19  (5  Geo.  I,  c.  19)  its  capital  was  further  increased. 
The  proprietors  of  certain  lottery  annuities  (created  by 
8  Anne,  c.  4)  of  thirty- two  years'  duration,  ^vere  per- 
mitted to  exchange  these  for  the  company's  stock,  £11 
IDS.  being  given  in  stock  for  every  £1  annuity.  £1 ,202,702 
were  subscribed.  Besides  this  the  company  advanced 
£544,142  in  cash.  Its  capital  and  the  government  debt 
to  it  were  thus  increased  to  £11,746,844.  A  more  im- 
portant project  for  consoHdation  and  funding  was  brought 
forward  in  1720,  when  it  was  determined  to  convert  the 
various  floating  debts  and  the  outstanding  terminable 
and  permanent  annuities  into  a  great  fund  of  permanent 
annuities  at  5  and  4  per  cent.  Both  the  Bank  of  England 
and  the  South  Sea  Company  competed  for  the  privilege 
of  carrying  out  this  scheme,  which  privilege  the  South 
Sea  Company  finally  secured  by  its  extravagant  offers." 
The  company  obtained  permission,  by  6  Geo.  I,  c.  4,  to 
carry  out  the  consolidation  by  taking  in  through  sub- 
scription or  purchase  from  the  creditors:  i.  The  irre- 
deemable debt,  consisting  of  £666,821  yearly  in  long 
annuities  (96,  98,  and  99  years)  and  £127,360  yearly  in 
short  annuities  (thirty-two  years,  the  remainder  of  the 
lottery  annuities  not  subscribed  in  the  previous  year). 

oThe  South  Sea  Company  possessed  a  powerful  friend  in  Mr.  Aislabie, 
who  was  then  chancellor  of  the  exchequer,  and  it  is  said  that  there  was 
Some  thought  of  transferring  to  it  the  whole  debt  owed  to  the  Bank.  "Some 
Considerations  on  the  National  Debt,"  London,  1729,  p.  71.  Cf.  with  refer- 
ence to  the  whole  plan  of  consolidation  and  its  consequences,  Anderson 
a.  1720. 

126 


The     English     Banking     System 

The  long  annuities  were  capitalized  at  twenty  years'  pur- 
chase, the  short  lottery  annuities,  which  had  still  twenty- 
three  years  to  run,  at  fourteen  years'  purchase.  2.  The 
redeemable  debt,  consisting  of  £11,779,660  at  5  per  cent, 
and  £4,776,821  at  4  per  cent,  at  such  prices  as  might  be 
agreed  upon  between  the  company  and  the  holders.  For 
this  purpose  the  company  might  borrow  money  on  its 
bonds  or  on  bills,  make  calls  for  money  on  its  members, 
or  increase  its  capital  by  the  issue  of  fresh  stock.  The 
latter  was  allowed  up  to  an  amount  corresponding  to  the 
combined  prices  of  the  long  annuities,  at  twenty  years' 
purchase,  of  the  short  annuities  at  fourteen  years'  pur- 
chase, plus  a  sum  equal  to  the  market  value  of  the  4  and  5 
per  cent  redeemable  debt.  In  return  it  undertook  to  pay 
the  Government  £4,156,306  for  the  cession  of  the  redeem- 
able debt,  and  £2,978,599  for  that  of  the  irredeemable 
debt,  or  a  total  of  over  seven  millions. 

The  company  had  to  buy  out  any  creditor  who  did  not 
wish  to  subscribe.  The  money  for  this  purpose  and  for 
its  payment  to  the  Government  it  hoped  to  obtain  through 
the  sale  of  the  stock,  since  it  expected  to  make  a  profit  by 
its  transactions  with  the  public  creditors.  For  although 
the  amount  to  which  its  capital  might  be  increased  was 
limited  as  explained  above,  there  was  no  limit  set  on  the 
price  at  which  the  stocks  were  to  be  sold.  This  consti- 
tuted the  risk  of  the  whole  undertaking,  for  the  tempta- 
tion to  use  every  means  to  drive  up  the  price  of  the  stock 
proved  too  great.  And  in  actual  fact,  for  a  large  number 
of  the  subscriptions,  the  company  raised  the  price  of  the 
£100  share  to  £1,000  in  money  or  government  debt.  In 
spite  of  this  exorbitant  figure  the  greater  part  of  the  debt 


127 


National    Monetary     Co  m  m  is  s  to  n 

was  subscribed,  and  the  capital  of  the  company  was 
increased  to  £7,802,200,  for  which  the  Government  had 
to  pay  an  annuity  reckoned  in  part  at  4  and  in  part  at  5 
per  cent,  and  amounting  in  all  to  £1,861,114.  Only 
£2,560,790  of  the  total  redeemable  debt  and  £161,380  of 
the  total  irredeemable  debt  was  not  subscribed.  These 
amounts  the  South  Sea  Company  could  only  secure  by 
purchase.  The  purchase  was  never  made,  for  in  the 
same  year  the  company  was  thrown  into  such  financial 
distress  by  the  crisis  which  has  since  received  the  name 
of  the  "  South  Sea  Bubble,"  that  the  most  vigorous  efforts 
on  the  part  of  the  Government  were  required  to  save  it 
from  complete  ruin,  and  there  could  be  no  mention  of  any 
payment  from  the  company  to  the  State. 

The  trade  carried  on  by  the  South  Sea  Company  proved 
no  source  of  income,  and  hence  it  had  nothing  but  the 
yearly  interest  from  the  Government  and  the  profits  on 
the  sale  and  purchase  of  its  stock,  out  of  which  to  provide 
a  dividend  for  the  shareholders.  In  spite  of  this  the 
directors  announced  on  August  31,1 720,  "that  30  per  cent 
in  money  should  be  the  dividend  for  the  half  year  which 
would  be  due  at  Christmas  following."  But  not  even  the 
Christmas  dividend  was  paid,  for  by  November  the  stock 
had  fallen  between  £600  and  £800  and  the  "bubble"  had 
burst.  Parliament  instituted  proceedings  against  the 
company's  directors,  clerks,  and  bookkeepers.  Mr.  Ais- 
labie  and  the  secretary  of  state,  Mr.  Craggs,  who  were 
found  guilty  of  fraudulent  relations  with  the  company, 
lost  their  seats  in  Parliament ,  the  property  of  all  of  them 
was  confiscated  and  administered  by  trustees  for  the  bene- 
fit of  the  creditors.     Finally  Walpole  proposed  energetic 


128 


The     English     Banking     System 

measures  to  restore  financial  order.  His  project  became 
law  by  7  Geo,  I,  c.  5.  It  provided  for  the  transfer  of 
nine  millions  of  the  capital  stock  of  the  South  Sea  Com- 
pany to  the  Bank,  and  of  a  like  sum  to  the  East  India 
Company,  at  a  price  to  be  arranged  between  the  compa- 
nies. This  proposal  was  not,  however,  carried  out;  and 
it  was  not  until  1722  (8  Geo.  I,  c.  21)  that  the  sale  to  the 
Bank  of  fom-  millions  in  stocks  was  decided  upon  and 
actually  accomplished.  The  Bank's  stock  was  increased 
by  this  amount  and  an  annuity  of  5  per  cent  (4  per  cent 
after  1727)  on  the  increase  was  paid  to  it  by  the  State. 

The  reduced  stock  of  the  South  Sea  Company  was  sub- 
jected to  further  changes  in  1722.  By  9  Geo.  I,  c.  6,  it 
was  divided  into  two  portions  of  £16,901,100  each;  half 
only  was  retained  as  trading  stock  for  the  company,  the 
other  half  was  to  be  regarded  as  a  government  annuity- 
bearing  debt  held  by  the  company.  This  debt  continued 
to  be  administered  by  the  South  Sea  Company,  under  the 
name  old  South  Sea  annuities,  until  its  repayment. 

Both  debts  were  diminished  through  redemptions  by 
about  two  and  one-fourth  millions  by  1733,  when  the 
whole  outstanding  debt  to  the  company  amounted  to 
£29,302,200.  By  6  Geo.  II,  c.  28,  a  further  portion  of  the 
trading  stock  was  added  to  the  old  South  Sea  annuities, 
so  that  the  two  now  amounted  to  £14,641,100  and 
£15,651,200,  respectively.  Moreover,  the  trading  stock 
was  divided  into  four  equal  parts  and  three-fourths  of  it 
was  converted  into  an  unincumbered,  negotiable  annuity 
stock.  Hence,  the  company's  capital  sank  to  £3,662,776 
whilst  the  remaining  £10,988,327  was  converted  into  the 


68299° — II 9  129 


\ 


National     Monetary     Commission 

new  South  Sea  annuities  which  were  placed  upon  the  mar- 
ket under  the  management  of  the  company. 

During  the  succeeding  years  £3,276,890  of  the  South 
Sea  debt  was  paid  off.  In  1751  the  debt  was  again  in- 
creased by  24  Geo.  II,  c.  2,  which  allowed  £2,100,000  to  be 
borrowed  not  from  but  through  the  South  Sea  Company. 
The  resulting  3  per  cent  annuities,  1751,  so  called,  were 
administered  by  the  company,  and  the  total  government 
debt  thus  administered  was  now  made  up  as  follows: 

£ 

Trading  stock 3.  662,  780 

Old  South  Sea  annuities 12,  404,  270 

New  South  Sea  annuities 8,  958,  255 

3  per  cent  annuities,  1751 2,  100,  000 

Total 27,  125,305 

Interest  (3  per  cent  on  all  debts  after  1757) 813,  760 

After  this  time  there  was  a  break  in  the  transactions 
between  the  company  and  the  State.  No  further  loans 
were  raised  through  the  company.  It  existed  as  a  corpora- 
tion until  the  middle  of  the  nineteenth  century,  having  no 
other  function  than  to  administer  a  portion  of  the  national 
debt;  with  regard  to  which  it  undertook  the  paying  off  of 
capital,  the  payment  of  dividends,  and  the  transference 
of  stock.  The  principle  of  incorporating  the  national 
debt  was  nowhere  more  strictly  carried  out  than  here. 
A  corporation  consisting  of  a  governor,  a  subgovernor,  a 
deputy  governor,  and  21  directors  had  no  further  reason 
for  its  existence  than  a  joint  ownership  of  a  government 
debt,  and  no  other  function  than  to  trade  in  this  debt  and 
to  carry  out  the  technical  duties  connected  with  the  pay- 
ments. 


130 


The     English     Banking     System 

The  paying  off  of  the  South  Sea  debt  proceeded  but 
slowly  during  the  eighteenth  century.  In  1797  the  total 
was  still  as  much  as  £21,182,285.  A  financial  report  of 
the  House  of  Commons  for  July  19  of  this  year  is  in  exist- 
ence, which  shows  clearly  that  there  was  still  no  distinct 
intention  to  transfer  the  entire  management  of  the  pubHc 
debt  to  the  Bank.     The  report  remarks: 

"  It  may  also  deserve  some  consideration,  at  some  future 
period,  whether  a  further  saving  might  not  be  procured 
for  the  Public,  if  the  South  Sea  Company  could,  by  the 
consent  of  the  Proprietors,  be  dissolved,  as  happened  in 
the  recent  instance  of  the  Million  Bank;  in  which  case 
the  management  of  that  part  of  the  Public  Debt  which 
consists  in  South  Sea  Annuities  might  be  transferred  to 
the  Exchequer,  or  to  the  Bank  of  England,  in  the  same 
manner  as  Parliament  has  recently  transferred  to  the 
Bank  the  management  of  that  part  of  the  Public  Debt 
which  was  previously  undei*  the  management  of  the  East 
India  Company." 

"  It  may  also  become  a  question  of  great  importance  to 
the  public  interest,  if  the  South  Sea  Company  should 
prefer  the  continuance  of  its  present  corporate  capacity, 
whether  it  may  not  be  enabled,  under  its  present  Charter, 
to  lessen  the  public  burthens  by  taking  under  its  manage- 
ment any  future  augmentations  of  the  Public  Debt,  and 
transacting  the  necessary  Transfers  and  Payments  of  Divi- 
dends, at  a  lower  rate  of  allowance  than  the  Bank  of 
England  may  at  any  time  be  wilUng  to  accept." 

The  development  of  closer  relations  between  the  Bank 
and  the  Government  explains  why  no  such  transfer  was 
ever  made. 


131 


National    Moftetary     Commission 

(c)  The  Bank  of  England. — Two  factors  must  bQ  dis- 
tinguished in  describing  the  development  in  this  case  also ; 
the  increase  in  the  public  debt  to  the  Bank,  and  the 
increase  in  the  pubUc  debt  which  was  incurred  through 
the  Bank  as  intermediary.  The  former  was  never  so 
great  as  in  the  case  of  the  South  Sea  Company,  while  the 
latter  was  much  more  important. 

The  original  capital,  which  bore  interest  at  6  per  cent, 
continued  to  receive  yearly  payment  at  this  rate  until  the 
middle  of  the  century,  by  which  time  it  had  been  increased 
by  other  loans  and  consohdations  bearing  interest  at  lower 
rates.  The  first  funding  of  exchequer  bills  and  their 
interest,  the  pecuHar  character  of  which  has  already  been 
pointed  out,  was  authorized  by  7  Anne,  c.  7,  but  at  the 
same  rate  of  interest,  which  was  then  (1710)  the  usual 
one.  The  national  debt  was  thereby  increased  by 
£1,775,027.  Ini7i7  the  rate  of  interest  on  this  debt  was 
lowered  to  that  paid  on  the  •East  India  and  South  Sea 
debts,  i.  e.,  to  5  per  cent.  The  same  act  (3  Geo.  I,  c.  8) 
authorized  the  funding  of  £2,000,000  in  exchequer  bills 
at  a  like  rate  of  interest.  Two  years  later  the  debt  to  the 
Bank  was  further  increased  by  the  purchase  already 
referred  to  of  four  millions  of  South  Sea  stock,  which 
after  1727  bore  interest  at  4  per  cent  only.  At  the  same 
date  the  annuities  on  the  debt  due  to  the  consohdation 
of  the  exchequer  bills  were  reduced  to  the  same  rate. 
In  1728  and  1729  (i  Geo.  II,  c.  8,  and  2  Geo.  II,  c.  3) 
three  millions  (altogether)  at  4  per  cent  were  added, 
while  at  the  same  time  the  whole  of  the  debt  funded  in 
1 7 10  and  half  a  million  of  that  funded  in  171 7  was  repaid. 
Another  million  of  the  latter  was  canceled  in  1738.     The 


13a 


The     English     Banking     System 

total  4  per  cent  debt  thus  amounted  to  £7,500,000.  In 
1742  (15  Geo.  II,  c.  13)  the  Bank  undertook  to  advance 
£1,600,000  without  interest,  if  the  annuity  paid  on  its 
original  capital  remained  untouched,  which  annuity  was 
equivalent  to  an  interest  of  3  per  cent  on  the  total  of 
£3,200,000.  In  1746  (19  Geo.  II,  c.  6)  exchequer  bills 
to  the  amount  of  £986,800  were  funded  at  4  per  cent. 
In  1750  (23  Geo.  II,  c.  i)  the  interest  on  the  whole  debt 
was  reduced  to  3^^  per  cent,  with  the  proviso  that  after 
December  25,  1757,  it  was  to  be  only  3  per  cent. 

The  following  table  gives  the  debt  to  the  Bank  in  a 
way  similar  to  that  given  above  for  the  debt  of  the  South 
Sea  Company: 

1 .  Original  capital :  £ 

Government  debt  in  1694 i,  200,  000 

Government  debt  in  1 708 400,  000 

Government  debt  in  1742 i ,  600,  000 

2.  Transference  of  part  of  the  government  debt  owed  to  the 

South  Sea  Company 4,  000,  000 

3.  Other  loans: 

1717.  Consolidation  of  remaining  exchequer  bills 500,  000 

1727 I, 750,  000 

1728 1 , 250,  000 

1746.  Consolidation  of  exchequer  bills 986,  800 

Total II,  686,  800 

Interest  (3  per  cent  on  all  debts  after  1757) 350,  604 

The  government  debt  to  the  Bank  during  this  period 
was  thus  not  equal  to  half  the  debt  administered  by  the 
South  Sea  Company.  It  remained  unaltered  until  the  sec- 
ond decade  of  the  nineteenth  century.  During  the  whole  of 
the  second  half  of  the  eighteenth  century  there  was  no 
increase  in  the  national  debt  through  loans  from  the  com- 
panies. As  we  have  already  noted,  lotteries  joined  to 
annuities,  and  various  combinations  of  annuity  loans,  were 


133 


National     Monetary     Commission 

then  more  in  favor.  The  share  which  the  Bank  had  so  far 
taken  in  the  management  of  such  loans  dated  from  1710, 
when  for  the  first  time  it  received  the  subscriptions  for  a 
lottery  loan  of  one  and  one-half  millions.  Considering  the 
existence  of  a  special  "lottery  annuity"  department  in 
the  Exchequer,  it  is  more  than  doubtful  if  it  also  undertook 
the  payment  of  the  annuities  connected  with  the  loan. 
It  did,  however,  receive  the  subscriptions  for  the  lotteries 
in  the  two  following  years  171 1  and  1712.  Whether  or  no 
it  had  to  pay  the  tickets  and  interest  connected  with  these 
loans,  it  was  at  any  rate  not  long  concerned  in  this  business, 
for  in  1720  nearly  all  the  lottery  annuities  were  converted 
into  South  Sea  stock. 

The  Bank  was  again  entrusted  with  the  raising  of  an 
annuity  loan  in  1 714.  i  Geo.  i,  c.  19  and  20,  authorized 
the  raising  of  £910,000  and  of  £169,000,  on  which  an  inter- 
est of  5  per  cent  was  promised.  The  Bank  kept  the  books 
for  the  subscriptions,  received  the  money,  and  sent  it  to 
the  Exchequer.  This  share  in  the  work  of  receiving  sub- 
scriptions was  undertaken  in  comparatively  early  times 
and  continued  for  all  subsequent  loans.  On  the  other 
hand,  the  payment  of  annuities  through  the  Bank  was  a 
policy  not  continuously  adhered  to.  That  this  method 
was  adopted  in  1 7 1 4  is  shown  by  the  yearly  payment  made 
to  the  Bank  for  its  administration.  The  same  arrange- 
ment was  made  in  1726  for  a  loan  of  a  million  administered 
by  the  Bank  (12  Geo.  II,  c.  2),  and  again  in  1731  for  a  sum 
of  £800,000  (4  Geo.  II,  c.  9),  and  after  this  frequently 
until  the  middle  of  the  centur\%  although  the  payment 
of  annuities  through  the  Exchequer  was  not  altogether 
discontinued. 


134 


The     English     Banking     System 

A  different  policy  was  initiated  in  1751.  This  year 
marks  an  epoch  in  the  history  of  the  Enghsh  pubhc  debt. 
The  debts  to  the  South  Sea  Company  and  to  the  Bank  were 
definitely  set  in  order  for  a  long  time  to  come  and  the  same 
thing  was  done  for  the  other  debts  not  connected  with 
the  companies.  By  25  Geo.  II,  c.  27,  various  3  per  cent 
annual  charges,  payable  some  through  the  Bank  and 
some  through  the  Exchequer,  which  amounted  in  all  to 
£9,137,821,  were  united  in  a  single  fund,  the  management 
of  which  was  entrusted  to  the  Bank.  The  interest  on  these 
"  3  per  cent  Consolidated  Annuities  "  was  paid  by  the  Bank 
half-yearly,  on  the  5th  of  January  and  the  5th  of  July. 

In  addition  various  4  per  cent  annuities  were  converted 
into  3X  per  cents,  with  the  proviso  that  half  of  them 
should  be  reduced  to  3  per  cent  in  1756,  and  the  other  half 
in  1758.  After  buying  out  the  creditors  who  would  not 
agree  to  this  reduction  the  annuities  of  the  remaining  credi- 
tors were  united  into  a  fund  of  £17,701,323  under  the 
name  "3  per  cent  Reduced  Annuities."  This  fund  also 
was  administered  by  the  Bank,  which  paid  the  interest  on 
the  5th  of  April  and  the  loth  of  October  in  each  year. 

Besides  the  above-mentioned  stocks,  there  were  still 
the  so-called  bank  annuities  on  the  loan  of  a  million  in 
1726,  and  £400,000  of  3>2  per  cent  annuities  which  were 
redeemed  in  1752.  The  total  public  debt  administered 
by  the  Bank  was  thus  composed  as  follows : 

£ 

Three  per  cent  consolidated  annuities 9,  137,  821 

Three  per  cent  reduced  annuities 17,  701,  323 

Three  per  cent  bank  annuities i ,  000,  000 

Total 27,  839,  144 

Interest  (3  per  cent  after  1757) 835,  174 


^iS 


National     Monetary     Commission 

To  the  above  debts  must  be  added  the  exchequer 
annuities,  annual  payments  for  Ufe  or  for  a  term  of  years 
payable  at  the  Exchequer,  which  had  not  been  subscribed 
to  form  any  of  the  preceding  stocks,  and  which  could  not 
be  redeemed  without  the  consent  of  the  holders.  These 
amounted  to  a  yearly  sum  of  £208,906.  With  this 
exception  the  administration  of  the  entire  public  debt 
was  practically  in  the  hands  of  the  companies.  The 
Bank  of  England  took  the  most  important  share,  exceed- 
ing that  of  the  South  Sea  Company  by  a  sum  of  twelve 
millions.  The  rate  of  interest  on  the  whole  of  the  debt 
was  reduced  to  3  per  cent. 

This  is  not  a  history  of  the  English  public  debt,  but 
merely  a  study  of  the  growth  of  its  connection  with  the 
banking  system,  hence  the  abundant  material  available 
for  the  history  of  the  debt  during  the  second  half  of  the 
eighteenth  century  need  not  be  further  examined. 

The  principle  that  the  administration  should  be  deputed 
was  established  by  the  middle  of  the  century.  The  policy 
became  definite,  not  by  any  further  development  of  the 
principle,  but  by  its  constant  application  when  fresh 
debts  were  contracted.  No  fresh  light  would  be  thrown 
on  the  subject  by  following  out  in  detail  the  numerous 
payments,  new  loans,  consolidations,  and  increases  and 
reductions  of  interest.  It  is,  however,  worth  while  to 
trace  the  increase  in  the  total  public  debt,  since  this  marks 
the  growing  importance  of  the  Bank  and  the  declining 
influence  of  the  South  Sea  Company.  Repayments  alone 
were  made  to  the  latter,  while  the  Bank  was  continually 
entrusted  with  new  loans,  and  the  total  public  debt  ad- 


136 


The     English     Banking     System 

ministered  by  it  as  intermediary  amounted  in  1800  to 
£393,114,680.  After  1751  the  fresh  debt  was  generally 
added  to  one  of  the  two  existing  funds,  and  increased 
either  the  3  per  cent  reduced  annuities,  which  had  risen 
to  £56,850,983  in  1800,  or  the  3  per  cent  consolidated 
annuities,  which  in  the  same  year  amounted  to  no  less 
than  £244,983,444.  Besides  these  there  were  4  and  5 
per  cent  annuities,  forming  separate  funds  and  amounting 
to  £44,762,860  and  £48,250,426,  respectively.  The  mil- 
lion of  bank  annuities  and  the  so-called  3  per  cent  imperial 
annuities  (loan  to  the  German  Emperor) ,  which  amounted 
to  £7,266,967,  made  up  the  remainder  of  the  permanent 
annuities  administered  by  the  Bank.  After  1761  it  had 
also  the  charge  of  terminable  annuities,  which,  in  1800, 
involved  a  yearly  interest  of  £1,665,739.  In  comparison 
with  these  important  items  of  the  debt,  the  exchequer 
armuities,  which  only  required  a  yearly  payment  of 
£131,980,  sank  into  insignificance. 

These  statistics  of  the  development  of  the  national 
debt  show  the  importance  of  the  duty  undertaken  by  the 
companies  in  administering  the  debt.  Hence  arises  the 
question  of  what  this  administration  consisted,  and  what 
payment  was  made  by  the  State  for  it. 

4.    THE    DUTIES    INVOLVED    IN  THE    MANAGEMENT    OF    THE    DEBT  AND   THE 
INDEMNITY   PAID   BY   THE    STATE. 

The  position  of  the  companies  varied  according  to 
whether  the  Government  borrowed  directly  from  them  or 
only  used  them  as  intermediaries.  In  the  first  case  they 
either  increased  their  capital  stock  by  the  amount  of  the 
loan,  i.  e.,  they  issued  stocks,  or  the  debt  simply  became 


137 


National    Monetary     Commission 

the  property  of  the  company,  and  was  entered  in  their 
accounts  among  the  outstanding  assets.  The  interest  on 
the  loan  was  then  reckoned  as  part  of  the  income  of  the 
company,  and,  with  the  rest  of  the  income,  was  divided 
among  the  shareholders  as  dividend.  When  the  govern- 
ment debt  led  to  the  issue  of  stock,  the  interest  paid  was 
still  reckoned  as  part  of  the  income  to  be  divided  among 
the  shareholders,  but  the  price  at  which  the  stock  was 
issued  gave  opportunity  for  profit.  Hence  for  the  indi- 
vidual the  amount  of  the  annuity  paid  by  the  State  was 
not  fixed,  for  this  was  paid  in  a  lump  sum  to  the  company, 
and  he  only  received  a  share  in  it  because  he  was  a  mem- 
ber of  the  company.  The  market  price  of  that  part  of 
the  company's  stock  which  owed  its  creation  to  a  public 
loan  was  thus  only  indirectly  determined  by  the  state  of 
public  credit;  it  was  also  influenced  by  the  other  business 
relations  of  the  company.  The  administration  of  these 
stocks  was,  however,  subject  to  the  usual  business  forms — 
registration  of  the  names  and  capital  of  the  holder  in  the 
books,  transference  at  will,  close  of  the  books  before  the 
time  for  the  payment  of  dividends,  fluctuations  in  the  divi- 
dends corresponding  to  fluctuations  in  business  transac- 
tions, etc. 

In  the  second  case,  when  the  loan  was  raised  through 
the  companies  as  intermediaries,  the  companies  had  no 
important  influence;  they  could  fix  neither  the  amount  of 
the  subscription,  nor  that  of  the  dividend.  The  latter 
was  determined  by  the  Government  once  for  all,  the 
former,  in  cases  where  it  was  variable,  depended  on  the 
offers  that  were  made.     In  the  last  resort,  however,  the 


138 


The     English     Banking     System 

State,  i.  e.,  the  Treasury,  had  to  decide  this.  The  pro- 
cedure carried  out  by  the  companies  in  these  cases  was 
as  follows:  In  the  act  of  Parliament  which  authorized 
the  loans  it  was  provided  that  the  cashiers  of  the  company 
should  receive  subscriptions.  They  were  instructed  to 
pay  the  sum  received  into  the  Exchequer  and  to  give  an 
account  of  the  same.  The  claims  of  the  individual  holders 
to  shares  in  these  loans  were  made  negotiable  at  the  office 
of  the  company  and  the  money  required  for  annuities  or 
other  payments  was  advanced  to  the  head  cashier  from 
the  receipt  side  of  the  Exchequer  by  way  of  imprest,  and 
upon  account.  The  books  which  related  to  the  govern- 
ment stocks,  and  which  were  kept  by  the  company,  were 
managed  exactly  on  the  same  principle  as  the  company's 
own  books.  The  account  of  the  holder  was  credited  with 
his  share  and  debited  with  the  sums  withdrawn  tlirough 
transfers,  redemptions,  etc.  The  payment  of  dividends 
was  managed  as  follows:  At  the  date  of  payment  a  sum 
equal  to  half  the  annuity  due  on  the  shares  payable  through 
the  company,  was  paid  by  the  Exchequer  to  the  company. 
The  latter  had  now  to  make  the  payments  to  the  different 
shareholders.  Accordingly  the  books  used  for  the  regis- 
tration of  transfer  were  closed,  the  shares  of  each  person 
were  copied  from  them  and  written  on  a  sheet  of  paper 
opposite  the  name  of  the  holder.  A  dividend  warrant 
was  filled  up  for  each  holder,  giving  his  name,  his  share 
in  the  capital,  and  the  dividend  due  thereon.  A  dividend 
book  was  then  made  up  in  duplicate  containing  in  alpha- 
betical order  the  names  of  the  holders  and  the  other  data. 
All  these  statements  were  verified  by  the  officials  at  the 
Bank,  and  the  warrants,  if  found  correct,  were  signed  by 


139 


National    Monetary     Commission 

one  of  them.  The  holders  demanding  the  dividend  wrote 
their  names  in  the  dividend  book  and  signed  the  warrant, 
which  latter  signature  was  certified  by  an  official.  The 
warrants  were  then  payable  at  the  office.  The  warrants 
paid  were  entered  in  a  cash  and  audit  book  and  their 
amount  was  compared  with  that  of  the  unpaid  ones  of 
which  a  list  was  made  out  of  the  dividend  books.  The 
total  must  equal  the  total  annuity  payable.*^ 

The  duty  of  presenting  accounts  on  the  receipt  of  the 
loans  and  the  payment  of  the  dividends  existed  until  the 
end  of  the  century,  and  alterations  were  made  only  in  con- 
sequence of  the  Report  of  the  Committee  of  1 780  on  Pub- 
lic Accounts.  Until  that  time  all  the  accounts  were  pre- 
sented to  the  auditor  of  imprest,  who  had  to  audit  them. 
The  fees  for  this  audit  amounted  to  £20,000,  an  unneces- 
sary expense,  since  the  payments  were  sufficiently  con- 
trolled in  other  ways.  The  subscriptions  to  a  loan  were 
handed  over  to  the  Exchequer,  where  receipts  were  given 
for  them  and  in  whose  accounts  they  appeared.  The  pay- 
ment of  capital  and  of  the  dividends  was  checked  by  the 
owners  themselves,  who  could  take  legal  means  to  enforce 
payment  from  the  company  should  it  refuse  the  same. 
Moreover,  the  presentation  of  accounts  was  not  consist- 
ently enforced.  The  Bank  had  to  send  in  accounts  of  all 
the  money  transferred  to  it  from  the  Exchequer,  as  well  as 
of  the  annuities  due  on  its  capital  stock;  the  South  Sea 
Company  need  only  present  them  for  the  annuities  of  1 751, 
the  East  India  Company  not  at  all.     But,  according  to  the 

o  An  account  of  the  duties  performed  by  the  companies  in  their  admin- 
istration of  the  public  debt  is  given  in  the  nth  Report  of  the  Committee 
on  Public  Accounts,  1780. 


140 


The     English     Banking     System 

proposal  made  by  the  committee  of  1 780,  the  matter  was 
so  regulated  that  the  companies  presented  no  accounts  on 
the  disposal  of  the  annuities  on  their  trading  stock,  but 
only  sent  in  a  general  account  to  the  Treasury  of  all  the 
government  annuities  paid  through  them,  which  account 
contained  a  statement  of  their  receipts  and  payments  in 
this  connection  and  of  the  remainder  of  the  dividends  and 
shares  still  unpaid. 

In  theory  the  duties  connected  with  the  management  of 
the  public  debt  were  simple  enough,  but  the  resulting  ex- 
penditure of  money  and  time  by  the  companies  was  so  con- 
siderable as  to  entitle  them  to  an  indemnity.  It  was  not, 
however,  till  a  centtuy  had  passed  that  this  was  accepted 
as  a  definite  principle.  At  first  such  payment  was  con- 
nected with  the  incurment  of  special  expenses  by  the  com- 
pany for  buildings,  officials,  servants,  printing,  etc.  Thus 
as  early  as  1694  the  Bank  received  £4,000  "toward  the 
expenses  of  the  House, "  and  in  1712  the  South  Sea  Com- 
pany received  £8,000  for  the  same  purpose.  The  East 
India  Company,  on  the  other  hand,  was  paid  no  indemnity 
of  this  kind  until  1751,  when  it  received  £1,687,  while  at 
the  same  time  its  annuity  was  reduced  from  4  to  3  per 
cent.  A  comparison  between  this  "allowance  for  man- 
agement" and  the  principal  debt  shows  that  there  was  no 
fixed  proportion  between  the  two.  Each  increase  of  the 
debt  was  accompanied  by  an  increase  of  the  allowance, 
voluntarily  agreed  upon,  while  a  corresponding  decrease 
followed  any  redemption  of  the  debt.  These  alterations 
were  not  always  stated  in  the  acts  themselves,  the  deter- 
mination of  their  amount  being  left  to  the  Treasury;  as, 
for  example,  in  the  case  of  the  East  India  Company  when 


141 


National     Monetary     Commission 

the  debt  to  it  was  transferred  to  the  administration  of  the 
Bank,  and  so  on. 

In  any  case  the  compensation  paid  for  the  raising 
of  a  loan  and  for  its  administration  rested  on  no  sys- 
tematic basis.  It  varied  according  to  whether  it  was 
a  question  of  raising  an  annuity  or  lottery  loan  or  of 
the  administration  of  annuities.  For  the  receipt  of 
subscriptions  an  indemnity  was  paid  at  first  only  to 
individual  officials  of  the  company,  who  were  specially 
indicated  (cashiers  and  bookkeepers).  This  was  not 
determined  by  law,  but  was  settled  by  the  Treasur}\ 
Thus  the  chief  cashier  received  £600  for  the  two  loans 
raised  by  the  Bank  m  1714.  From  1719  onward  the 
amount  was,  with  few  exceptions,  £805  los.  lod.  per 
million.  For  lottery  loans  it  varied  from  £1,000  to 
£2,000.  The  annual  indemnity  for  the  administration 
of  the  annuities  was  also  originally  paid  to  the  head 
cashier  and  the  head  bookkeeper.  Thus  the  former 
received  £650  and  the  latter  £600  for  the  two  annuities 
in  1 714.  For  the  million  in  1726  a  yearly  sum  of  only 
£360  was  paid,  and  that  directly  to  the  Bank  ("for 
the  use  of  the  Governor  and  Company  of  the  Bank  of 
England").  In  1742  a  yearly  sum  was  again  granted 
to  the  cashier  and  bookkeeper,  and  the  Bank  received 
nothing.  The  annual  payment  after  the  date  of  the 
consolidation  in  1751  was,  however,  made  to  the  Bank, 
and  amounted  to  £562  los.  per  million.  Since  this  was 
reckoned  according  to  the  amount  of  the  capital  and  not 
of  the  annuity,  the  terminable  annuities  were  capitalized 
at  twenty-five  years'  purchase  and  the  yearly  payment 
calculated  on  the  resulting  amount. 


142 


The     English     Banking     System 

The  allowance  to  the  South  Sea  Company  was  £21,397 
after  the  great  consolidation  in  1720,  and  £1,181  for 
the  annuities  of  1751,  i.  e.,  £562  los.  per  million.  This 
decreased  in  proportion  as  the  debt  was  repaid. 

The  chief  commissioners  of  audit  made  representa- 
tions to  the  Treasury  in  1781  with  regard  to  the  indemnity 
paid  to  the  Bank,  and  proposed  the  establishment  of 
an  independent  office  for  the  administration  of  the  debt, 
by  which  proceeding  the  expenses  would  be  decreased 
by  two-thirds.  As  a  result  of  this  an  agreement  was 
made  between  the  Bank  and  the  Treasury  which  was 
embodied  in  a  treasury  minute  (legally  confirmed  by  31 
Geo.  Ill,  c.  33).  This  fixed  the  sum  for  charges  of  man- 
agement of  all  public  debts  administered  by  the  Bank 
at  £450  per  million.  Only  two  payments  were  excepted 
from  this,  the  £4,000  which  had  been  paid  for  the  capital 
stock  since  1694,  and  £1,898  3s.  4d.  which  had  been 
paid  since  1722  for  the  stock  purchased  from  the  South 
Sea  Company.  The  payments  for  receiving  the  sub- 
scriptions to  the  loans  continued  at  the  rate  of  £805 
los.  lod.  per  million  for  annuities  and  £1,000  for  lot- 
teries. The  South  Sea  Company  received  its  annual 
payment  undisturbed  at  the  rates  hitherto  paid. 

ii.  the    administration    of    public    money    and    the 
bank's  share  therein. 

The  preceding  account  shows  that  the  assumption  of  the 
management  of  the  public  debt  by  the  Bank,  the  East 
India  Company  and  the  South  Sea  Company,  respectively, 
was  directly  connected  with  the  raising  of  government 
loans  by  these  companies.     There  was  no  such  point  of 


143 


National      Monetary       Commission 

departure  for  the  transference  to  the  Bank  of  the  work 
done  by  the  pay  offices.  Owing  to  the  pecuHar  way  in 
which  the  debt  was  managed,  the  former  change  involved 
no  alteration  of  the  government  offices.  But  the  com- 
plete transference  of  the  management  of  public  money  to 
the  Bank  necessitated  a  reform  of  the  entire  financial 
administration.  The  system  of  public  payments  forms 
part  of  a  complicated  process,  in  which  three  principal 
factors  can  be  distinguished,  (i)  The  collection  of  the 
public  revenues  and  their  distribution  to  meet  the  various 
public  liabilities;  this  we  shall  call  the  transfer  of  funds. 
This  process  is  controlled  (2)  by  the  power  of  disposing  of 
the  public  revenue — the  right  of  assignment.  Finally  (3) 
the  system  of  public  accounts  and  audit  is  concerned  with 
every  alteration  in  the  public  assets,  whether  through 
receipts  or  issues,  in  order  to  secure  an  economical  admin- 
istration of  the  finances  and  to  prevent  loss.  The  regular 
performance  of  these  three  functions  is  the  duty  of  a 
special  group  of  government  departments.  The  transfer 
of  funds  goes  on  within  the  system  of  pay  offices ;  the  right 
of  assignment  is  exercised  by  the  administrative  offices, 
and  other  independent  offices  are  occupied  with  the  presen- 
tation and  audit  of  accounts.  If  a  bank  is  to  enter  this 
group  of  coordinated  authorities,  it  is  clear,  first  of  all, 
that  there  is  only  one  of  them,  namely,  the  pay  offices  for 
the  transfer  of  funds,  whose  duties  it  can  undertake.  The 
machinery  of  banking  is  imquestionably  as  well  adapted 
to  carry  out  the  transfer  of  funds  as  are  pay  offices.  But 
the  extent  to  which  the  Bank  can  undertake  this  duty  and 
the  problem  of  organizing  it  to  carry  out  its  share  of  the 
work  depend  largely  on  the  system  of  pay  ofi&ces  which  it 


144 


The     English     Banking     S  y  s  t  e 


m 


replaces  and  on  the  principles  according  to  which  the 
transfer  of  funds  is  conducted.  Both  these  matters,  how- 
ever, influence  the  development  of  the  right  of  assign- 
ment and  the  system  of  audit.  Theoretically  these  latter 
are  not  affected  by  the  decision  to  employ  a  bank  for  trans- 
fers of  public  money,  but  in  practice  their  form  is  dependent 
thereon.  The  alteration  in  the  system  of  pay  offices  was 
combined  in  England  in  actual  fact  with  a  change  in  the 
extent  and  exercise  of  the  right  of  assignment,  at  least  as 
regards  the  persons  ultimately  responsible  for  the  manage- 
ment of  public  finance,  and  in  the  system  of  public  accounts 
and  audit.  In  many  cases  the  changes  were  only  parallel 
reforms,  but  they  were  constantly  connected,  owing  to  the 
unity  which  always  characterizes  the  administration  of  the 
public  money. 

We  must  consequently  show,  at  least  in  the  essential 
stages,  how  the  principle  of  administration  of  public 
money  by  the  Bank  was  introduced  side  by  side  with 
reforms  in  the  associated  departments  of  the  financial 
administration.  These  occurred  chiefly  in  the  nineteenth 
century.  Until  nearly  the  end  of  the  eighteenth  century 
the  financial  administration  remained  unchanged,  so  far  as 
concerned  the  organization  of  public  money,  of  accounts, 
and  of  audit.  We  need  here,  therefore,  only  consider  the 
state  of  things  which  has  arisen  in  the  coiu-se  of  the  nine- 
teenth century. 

(i)    The   central   financial  authorities. — The  Treasury  and 

the  Exchequer. 

As  early  as  the  twelfth  century  England  possessed  a 
strongly  organized  central  authority  for  the  whole  admin- 
istration, instituted  with  the  establishment  of  the  Norman 


68299° — II 10  '45 


National      Monetary       Commission 

feudal  State.«*  The  most  important  function  exercised 
by  this  authority  was  the  administration  of  finance.  The 
receipts  and  issues  were  regulated  by  it,  the  former  being 
concentrated  in  the  public  Exchequer,  into  which  they 
were  paid  by  the  collectors ;  the  accounts  of  those  who  had 
accounts  to  render  were  audited;  financial  disputes  were 
adjusted.  In  the  coiu-se  of  time  the  other  branches  of  the 
administration  were  separated  off,  and  the  administration 
of  the  central  finance  alone  remained  and  was  carried  on 
under  the  name  of  the  ancient  authority,  the  Exchequer. 
And  this  office,  too,  was  split  up,  though  much  later,  into  a 
court  of  justice  and  departments  of  administration  and  of 
cash  and  audit.  The  Court  of  Exchequer  was  fully  organ- 
ized under  the  Tudors  and  after  this  time  had  only  a  formal 
connection  with  the  financial  administration.  Adminis- 
trative business  left  the  Exchequer  in  the  sixteenth  cen- 
tury. Only  the  management  of  Crown  property,  which 
had  been  connected  with  the  Exchequer  from  early  times 
remained  under  its  control.  On  the  other  hand,  the 
authorities  which  were  constituted  to  administer  new 
branches  of  revenue  were  no  longer  included  in  the  Ex- 
chequer. A  clear  distinction  between  the  management 
of  the  receipts  and  expenditure,  and  the  audit  of  accoimts, 
was  not  made  until  the  eighteenth  and  nineteenth  cen- 
turies, when  the  enormous  increase  in  expenditure  necessi- 
tated methodical  procedure,  and  the  development  of  par- 
liamentary control  imposed  responsibility. 

a  Described  by  Gneist,  "  Engl.  Verwaltungsrecht,"  1867, 1,  §  193;  Reinhold 
Pauh,  "Geschichte  von  England,"  1853,  Bk.  II,  §  136;  both  are  based  upon 
Madox  "The  History  of  the  Exchequer,"  London,  1769  (2d  edition); 
Thomas,  "The  Ancient  Exchequer  of  England,"  London,  1845,  from  which 
the  following  account  is  also  taken. 


146 


The     English     Banking     System 

The  original  directors  of  this  central  authority  were 
the  treasurer,  for  all  receipts  and  expenditure,  and  the 
chancellor,  or  " chancellor  of  the  exchequer,"  as  he  was 
called  to  distinguish  him  from  the  lord  chancellor,  for 
accounts  and  audit.  These  officers  may  be  regarded  as 
corresponding  to  the  Händler  and  Gegenhändler  of  the 
German  treasuries  in  the  middle  ages.  But  owing  to 
the  position  of  the  Exchequer  and  its  connection  with 
all  other  public  business  their  importance  far  exceeded 
that  of  mere  revenue  officials.  Hence  as  public  business 
increased  in  extent  they  abandoned  their  close  connec- 
tion with  the  Exchequer,  retaining  only  the  ultimate  con- 
trol of  finance  as  part  of  the  administrative  system  which 
had  passed  into  their  hands.  It  is  said  that  under  Lord 
Burleigh,  in  the  time  of  Elizabeth,  the  treasurer  no  longer 
appeared  in  person  at  the  Exchequer,  to  manage  the  busi- 
ness there,  but  that  his  orders  were  sent  in  writing.  We 
must  regard  this  as  the  period  when  an  independent 
office,  the  Treasury,  developed  alongside  of  the  Exchequer 
for  the  management  and  conduct  of  the  finance,  while 
the  Exchequer  itself  continued  to  be  the  head  office  for 
payments,  accounts,  and  audit.  The  chancellor  of  the 
exchequer  was  originally,  so  long  as  both  were  connected 
with  the  Exchequer,  an  officer  appointed  to  check  the 
treasurer;  but  as  early  as  1434  he  was  designated  "vice" 
or  "under  treasurer."  He  also,  therefore,  \Yas  trans- 
ferred to  the  business  of  financial  administration.  Thus 
in  the  sixteenth  century  the  Treasury  appears  as  a  minis- 
try of  finance,  in  contrast  with  the  Exchequer,  which  was 
now  a  subordinate  department  for  the  management  of 
public  money  and  accounts.     Only  one  idea  is  continu- 


147 


National      Monetary       Commission 

ously  connected  with  the  Exchequer,  viz,  that  the  assign- 
ments of  the  Treasury  shall  be  checked  there.  The  Ex- 
chequer is  subordinate  to  the  Treasury  in  regard  to  the 
appointment  of  its  officials  and  the  organization  of  its 
activities,  but  in  one  matter  the  two  are  on  an  equality. 
Disputes  between  them  are  referred  only  to  the  court  of 
exchequer.  On  this  single  point  depends  at  a  later  date 
the  whole  of  the  reorganization  of  the  system  of  control. 

In  the  Exchequer  itself  the  business  connected  with  the 
public  accounts  was  carried  on  in  two  departments — the 
receipt  side  and  the  account  side  of  the  Exchequer. 

The  receipt  side  was  the  central  public  Treasury.  Its 
duties  were  the  receipt,  the  custody,  and  the  issue  of  the 
public  revenue.  All  receivers  and  collectors  must  peri- 
odically send  their  superfluous  cash  there,  and  thence, 
on  the  authority  of  a  royal  warrant  or  treasury  order, 
the  public  money  was  transferred  to  the  paymasters  or 
actually  paid  out  direct.  Periodic  accounts  of  the  receipts 
and  issues  of  public  money  were  compiled  there  and 
communicated  to  the  Treasury,  so  that  the  management 
of  the  revenue  might  be  examined.  The  officers  of  the 
Exchequer  were: 

(i)  The  auditor  of  the  receipt.  This  officer  had  re- 
placed the  treasurer,  and  his  duties  were  "to  keep  the 
keys  of  the  King's  Treasury,  which  belong  to  the  Treas- 
urer in  his  stead,  and  to  enroll  the  Receipts  and  Issues 
made  in  the  Receipt,  and  to  write  the  Tallies."  Thus  in 
his  department  the  warrants  for  payment  were  registered, 
the  cashbooks  were  kept,  and  the  accounts  of  the  treas- 
urer were  compiled. 

a  Thomas,  loc.  cit.,  p.  129. 
148 


The     English     Banking     Sy  stem 

(2)  The  clerk  of  the  pells.  This  officer  kept  the  books 
and  acted  as  a  check  on  the  auditor.  All  business  con- 
nected with  the  public  money  (assignment,  receipt,  and 
issue)  was  recorded  by  him. 

(3)  The  tellers,  the  actual  cashiers. 

(4)  The  chamberlains,  who  had  to  supply  the  tallies 
used  as  receipts. 

The  persons  hitherto  named  were  the  chief  officers  on 
the  receipt  side."  There  was  naturally,  as  time  went  on, 
an  increase  in  the  number  of  officers,  but  this  of  itself 
did  not  affect  their  position.  A  rise  in  the  status  of  an 
officer  may,  on  the  one  hand,  be  due  to  an  increase  in  his 
duties  or,  on  the  other,  to  the  fact  that  the  head  officer 
has  acquired  the  right  to  appoint  a  deputy.  Each  of  the 
above-named  officers  had  a  deputy  at  the  end  of  the 
seventeenth  century  and  perhaps  even  earlier.  The 
actual  duties  of  the  office  were  transferred  to  the  deputy. 
The  office  of  treasurer  itself  arose  in  ancient  times  in  such 
a  manner.  But  no  new  functions  were  given  to  the  indi- 
viduals who  thus  freed  themselves  from  their  official 
duties.     Their  posts  consequently  became  sinecures. 

a  A  more  complicated  organi7ation  grew  up  toward  the  end  of  the 
seventeenth  and  beginning  of  the  eighteenth  centuries  owing  to  the  devel- 
opment of  the  system  of  public  debt.  Thus  in  1704  we  find  an  exchequer 
bills  office  with  a  head  and  under  officers,  an  annuity  office  with  two 
departments — the  bookkeeping  office  (three  officials)  and  the  pay  office 
(five  officials)— a  malt  and  a  million-lottery  office,  the  former  with  four,  the 
latter  with  three  officials.  These  offices  were  created  for  certain  special 
purposes  and  were  really  special  pay  offices.  But  they  formed  part  of  the 
receipt  side  of  the  Exchequer,  i.  e.,  a  part  of  the  pubHc  central  treasury. 
They  were  not  permanent.  The  exchequer  bills  and  the  annuity  oftlces 
alone  survived  until  the  nineteenth  century.  These  offices  were  origi- 
nally intended  to  manage  the  whole  of  the  exchecjuer  bills  and  the  annuity 
loans,  but  their  duties  were  limited  by  the  intervention  of  the  Bank  to,  in 
the  first  case,  the  preparation  of  and  payment  of  interest  on  the  bills  and, 
in  the  second  case,  to  the  management  of  certain  annuities. 

149 


National      Monetary      Commission 

The  examination  into  the  expenditure  of  the  public 
revenue  was  made  on  the  account  side  of  the  Exchequer, 
The  procedure,  already  described  by  Gneist,  here  took  on 
a  semi-judicial  form,  since  the  barons  assembled  as  the 
court  of  the  exchequer  decided  disputes  on  points  of  law 
which  had  arisen  in  the  course  of  the  financial  adminis- 
tration, and  swore  in  the  officials  who  had  to  present 
accounts  and  must  affirm  them  on  oath.  The  charging 
and  discharging  of  these  public  accountants  and  the  exam- 
ination of  their  accounts  were  the  duty  of  a  w^hole  succes- 
sion of  officials  representing  the  various  audit  authorities, 
before  the  matter  came  before  the  barons  and  was  judi- 
cially decided.  The  system  of  accounting  was,  until  the 
nineteenth  century,  extraordinarily  complicated,  and 
involved  so  many  subordinate  offices  and  special  forms  of 
presenting  accounts  that  an  examination  thereof  would  be 
beyond  the  scope  of  this  book.  One  distinction  must, 
however,  be  noted  here,  since  it  has  become  important  in 
connection  with  the  further  development  of  methods  of 
audit. 

In  very  early  times  the  clerk  of  the  pipe  and  the  con- 
troller of  the  pipe,  who  assisted  him  and  also  superv^ised 
him,  were  the  only  officials  who  exercised  a  control  over 
the  expenditure.  The  former  kept  the  great  roll  of  the 
pipe  in  which  the  different  accountants  were  charged  with 
the  sums  debited  to  them,  and  after  the  presentation  of 
their  accounts  were  discharged.  This  discharge,  by  enter- 
ing the  quietus  est  in  the  pipe  roll,  could  only  tak^  place 
with  the  controller's  consent.  These  two  persons  were 
thus  the  only  controlling  officials  and  their  competence 
comprised  the  accounts  of  the  entire  country,  as  is  shown 


ISO 


The     English     Banking     System 

by  the  division  of  the  pipe  roll.  But  as  early  as  the  thir- 
teenth century  the  foreign  roll  appears  alongside  of  the 
pipe  roll.  This  roll  obtained  its  name  from  the  fact  that 
in  it  only  such  entries  were  made  as  had  not  been  already 
by  custom  assigned  to  the  pipe  roll.  Thus  in  it  were 
registered  the  accounts  arising  out  of  the  collections  and 
applications  of  the  annual  supplies  voted  by  Parliament. 
It  was  kept  by  officials  called  "auditors."  In  1547 
another  division  was  made  amongst  these  officials,  the 
audit  of  the  accounts  arising  out  of  the  administration  of 
the  crown  lands  being  assigned  to  special  auditors  of  the 
land  revenue,  while  the  auditors  of  the  foreign  roll  were 
called  "Auditors  of  Prests  and  Foreign  Accounts,"  and 
later,  "Auditors  of  Imprest."  All  these  different  offices, 
which  were  not  subdivisions  of  a  single  head  office  but 
were  independent  audit  authorities,  continued  to  exist 
side  by  side  in  the  eighteenth  century.  The  auditors  of 
imprest,  however,  became  the  most  important,  owing  to 
the  increase  in  the  parliamentary  grants  whose  applica- 
tion they  had  to  control.  This  brought  them  into  con- 
tact with  Parliament  itself,  and  when  the  organization 
of  the  system  of  audit  was  taken  in  hand,  attention  was 
first  directed  to  them. 

It  can  not  be  shown  that  there  was,  properly  speaking, 
any  dependence  of  the  one  side  of  the  Exchequer  on  the 
other.  But  there  was  necessarily  a  close  connection. 
The  half  yearly  statement  of  accounts  made  by  the  audi- 
tors of  the  receipt  formed  the  basis  on  which  the  entire 
audit  and  control  of  the  account  side  was  founded.  The 
receipt  side  charged  the  accountants,  the  account  side 
checked  their  discharge.     The  receipt  side  had  to  prepare 


151 


National      Monetary       Commission 

the  wooden  tallies  used  as  quittances.  When  such  a  tally 
was  used  as  a  receipt  for  money  paid,  it  was  divided  into 
two  parts.  The  one,  the  foil,  was  given  out;  the  other, 
the  counterfoil,  was  retained.  The  collector  in  presenting 
his  accounts  sent  in  the  foils  as  vouchers.  The  foils,  if 
correct,  must  agree  with  the  counterfoils.  On  each 
return  made  by  the  collectors,  the  chamberlains  noted 
whether  the  foils  belonging  thereto  were  in  order;  then 
the  return  was  sent  to  the  clerk  of  the  pipe  or  to  an  audi- 
tor. The  close  connection,  formed  by  daily  business  rela- 
tions, between  the  receipt  side  and  the  account  side  of  the 
Exchequer,  must  necessarily  have  caused  any  alteration 
on  the  one  side  to  be  felt  on  the  other. 

(2)  The  position  of  the  receipt  offices  and  the  Exchequer. 

Until  the  seventeenth  century  the  collection  of  the  pub- 
lic revenue  was  managed  by  local  administrative  offices, 
such  as,  for  instance,  the  self-governing  bodies,  the  sheriffs, 
ministers,  and  receivers,  and  the  commissioners  appointed 
on  one  occasion  or  another,  who  were  directly  subordinate 
to  the  Treasury  and  in  direct  connection  with  the  Excheq- 
uer." As,  however,  the  system  of  taxation  developed 
during  the  seventeenth  and  eighteenth  centuries,  the 
formation  of  head  revenue  offices  proceeded  also,  which 
offices  were  indeed  under  the  Treasury,  but  could  act 
independently  within  the  limits  set  by  acts  of  Parliament 
and  regulations.  The  Treasury  remained  as  before  the 
head  of  the  financial  administration,  but  the  duties  were 
discharged  by  these  head  offices.  They  developed  as  a 
rule  in  proportion  as  the  taxes  when  once  imposed  were 

«Cf.  Gneist,  loc.  cit.,  Bk.  I,  p.  326  et  seq.,  p.  617;  Bk.  II,  p.  781. 

152 


The     English     Banking     S  y  s  tern 

made  perpetual,  as  the  public  expenses  which  were  sep- 
arately appropriated  to  separate  heads  of  the  revenue 
increased,  and  as  the  complexity  of  the  forms  of  taxation 
demanded  administration  and  no  longer  mere  collection. 

Thus  in  1661  a  board  of  commissioners  was  created  to 
administer  the  customs,  and  these  for  the  first  time  came 
entirely  under  the  management  of  the  State. '^  In  a  similar 
manner  by  12  Chas.  II,  c.  35,  the  postal  administration 
was  reorganized  and  this  culminated  in  the  foundation  of  a 
general  post  office  in  London.  In  the  same  year  the  taxes 
associated  together  under  the  general  name  "excise," 
which  had  hitherto  been  only  temporary,  were  now  by 
12  Chas.  II,  c.  23  and  24,  voted  for  the  lifetime  of  the 
King,  and  he  was  allowed  to  erect  a  head  office  in  London 
for  the  better  administration,  collection,  and  custody  of 
the  receipts.  Among  the  taxes  afterwards  administered 
by  this  office  was  the  salt  tax,  imposed  in  1694,  the  man- 
agement of  which  was  separated  off  in  1 702  and  intrusted 
to  its  own  office,  but  in  1798  was  again  united  with  the 
excise.  ^ 

The  taxes  imposed  in  William  Ill's  reign — stamp  tax, 
license  for  hackney  coaches,  house  duty,  tax  on  hawkers 
and  peddlers — were  each  administered  by  a  separate  head 
office.  *=     The  land  and  malt  tax  occupied  a  peculiar  posi- 

a  "The  History  of  Taxes  from  William  the  Conqueror  to  the  Year  1761." 
In  ancient  times  the  farming  out  of  the  customs  was  usual.  A  definite 
organization  of  the  customs  administration  was  not  made  until  the  century- 
above  referred  to,  by  12  Chas.  II,  c.  4. 

&  The  salt  tax  was  imposed  by  5  and  6  Will,  and  Mary,  c.  7.  Its  admin- 
istration was  separated  from  that  of  the  excise  by  i  Anne,  c.  7,  and  was 
again  united  to  it  by  38  Geo.  Ill,  c.  88. 

c  The  stamp  tax  was  imposed  by  5  and  6  Will,  and  Mary,  c.  21,  the  tax 
on  hackney  coaches  by  c.  22  of  the  same  year,  that  on  hawkers  and  peddlers, 
etc.,  by  8  and  9  Will.  Ill,  c.  25. 

IS3 


National      Monetary       Commission 

tion  throughout  the  century,  being  collected,  in  accordance 
with  the  annual  vote,  by  receivers  general  for  the  different 
counties,  who  were  appointed  in  each  year  by  act  of  Parlia- 
ment. This  branch  of  the  revenue,  which  later  formed  a 
basis  for  the  income  tax,  was  permanently  organized  only 
in  1797.'^ 

The  receivers  general — the  chief  recei\dng  officers  in  the 
different  counties,  under  whom  head  collectors  and  col- 
lectors managed  the  local  revenue  service — were  subordi- 
nated to  the  head  offices.  The  local  divisions  of  the 
revenue  offices  were  naturally  not  aUke  for  all  branches  of 
the  revenue,  but  were  formed  according  to  the  importance 
of  the  different  sources  of  supply. 

After  the  erection  of  special  head  offices  for  the  admin- 
istration of  the  different  branches  of  the  revenue,  the 
receipts  for  the  latter  were  accumulated  first  in  their 
respective  offices,  and  thence  dehvered  to  the  Exchequer. 
In  so  far  as  the  duties  were  paid  in  London  itself,  the  head 
office  served  both  as  a  receiving  office  for  the  local  revenue 
and  as  an  accumulating  office  which  was  in  direct  con- 
nection with  the  receivers  general,  who,  in  their  turn, 
through  the  head  collectors  and  collectors,  accumulated 
the  revenue  collected  in  each  county.^  The  interval  of 
time  allowed  to  the  actual  collectors  in  which  to  send 
their  money  to  the  receivers  and  to  the  latter  in  which 
to  send  it  to  the  head  office,  as  also  the  fees  paid  to  the 

a  By  37  Geo.  Ill,  c.  35. 

&  The  payment  of  the  land  tax  and  excise  duties  seems  to  have  been  the 
only  exception  to  this  clumsy  method.  In  their  case  the  act  imposing  the 
taxes  provided  that  payment  should  be  made  to  the  Exchequer  through  the 
receivers.  These  direct  payments  ceased  again  however  when  it  became 
common  to  use  bills  of  exchange  which  could  only  be  cashed  at  the  head 
office. 


»54 


The     English     Banking     System 

different  offices,  was  usually  specified  in  the  act  ordering 
the  collection  of  the  revenue.  To  see  that  these  regula- 
tions were  carried  out  was  the  duty  of  the  head  offices 
and  ultimately  of  1;he  Treasury  as  controlling  the  entire 
financial  administration. 

The  provisions  with  regard  to  the  head  offices  which 
were  made  in  the  original  laws  estabUshing  them,  con- 
tinued in  force  throughout  the  eighteenth  century  as  is 
shown  by  the  facts  brought  to  light  by  the  commission 
of  inquiry  in  I'j'&o."'  The  receivers  general  of  the  land 
tax  and  of  the  direct  taxes,  which  were  collected  at  the 
same  time,  must  send  the  money  for  the  land  tax  to 
London  within  twenty  days  of  its  receipt,  and  the  money 
for  the  others  within  forty  days  of  its  receipt.  In  the 
case  of  the  excise  the  interval  varied  according  to  the 
distance  from  London;  it  was  twenty-one,  thirty,  and 
sometimes  fifty  or  sixty  days.  The  customs  had  to  be 
forwarded  immediately  to  the  head  office  and  no  collector 
might  keep  more  than  £100.  At  the  beginning  of  each 
week  the  head  office  transferred  the  receipts  of  the  pre- 
vious week  to  the  Exchequer.  The  same  procedure  was 
followed  in  the  stamp  and  salt  offices.  The  hawker  and 
peddler  office  paid  into  the  Exchequer  weekly,  if  it  had 
accumulated  more  than  £200.  The  hackney  coach 
office  paid  in  every  three  months,  in  case  the  receipts 
amounted  to  more  than  £1,000.  The  post  office  paid  in 
£700  weekly  and  its  entire  balance  quarterly. 

After  the  end  of  the  seventeenth  century  the  revenue 
was  no  longer  sent  in  coin  to  London.'  In  1696  the  com- 
et The  first  and  second  reports  are  concerned  with  the  collection  of  the 
revenue. 


^SS 


National      Monetary       Commission 

missioners  of  excise  ordered  that  no  collector  in  the  country 
should  send  coin  if  he  could  obtain  a  good  bill  of  exchange." 
This  greatly  simplified  what  had  hitherto  been  a  cere- 
monious transportation  of  money  under  the  escort  of 
armed  men,^  and  the  other  offices  probably  soon  followed 
this  example.'^  Although  no  legal  regulation  was  made, 
this  form  of  transaction  had  already  been  generally 
adopted  by  the  revenue  offices  at  the  time  of  the  commis- 
sion of  1780  and  the  succeeding  years.  As  happened 
throughout  the  development  of  the  English  Exchequer, 
the  independence  of  the  individuals  intrusted  with  the 
management  of  the  public  money  led  to  the  adoption  by 
the  public  offices  of  the  ordinary  economic  methods  of 
exchange. 

It  does  not  lie  within  the  scope  of  this  work  to  enter 
upon  a  closer  examination  of  the  official  rights  of  these 
authorities.  It  will  suffice  to  call  attention  to  one  axiom 
which  was  of  importance  in  the  development  of  the 
Exchequer — that  all  its  officials  were  absolutely  inde- 
pendent in  their  appHcation  and  employment  of  the 
public  money.  Each  official  had  to  give  security  depend- 
ing in  amount  on  that  of  the  money  to  be  received.  He 
must  present  accounts  of  the  receipts,  and  hand  over 
within  the  legal  interval  the  amount  stated  in  the  account, 
but  there  was  no  distinction  drawn  between  his  private 
property  and  the  public  money  in  his  possession.     When 

o  Announcement  of  the  commissioner  of  excise.  London  Gazette,  July 
9-13,  1696. 

&  "Treasury  Papers,"  1697,  Vol.  XLVII,  No.  8,  and  1701,  Vol.  LXXIX, 
No.  66,  contain  statements  of  the  cost  of  transporting  money  in  this  way: 
£7  6s.  must  be  paid  daily  for  a  man  and  horse. 

c  In  1697  the  collectors  of  a  poll  tax  sent  their  money  to  London  by  bills 
of  exchange.     "Treas.  Papers,"  1697,  Vol.  XLVII,  No.  8. 

IS« 


The     English     Banking     System 

in  171 1  the  Bank  of  England  petitioned  the  lord  high 
treasurer  to  use  his  influence  to  induce  the  receivers  to 
conduct  their  business  with  it,  the  treasurer  applied  to  the 
commissioners  and  received  the  following  answer:  "The 
Commissioners  will  exhort  the  Receivers,  which  is  all  that 
can  be  done,  since  they  and  their  security  are  answerable 
for  all  failures."  °'  The  object  of  the  Bank  was  probably 
to  get  the  business  of  exchange  into  its  own  hands,  but 
pressure  on  the  part  of  the  superior  authorities  failed, 
owing  to  the  independent  responsibility  of  the  receivers, 
with  whom  a  large  liberty  must  be  left  to  deal  as  they 
thought  fit  with  the  public  money,  since  the  full  responsi- 
bility for  it  fell  upon  them. 

The  natural  effect  of  this  axiom  was  that  the  receivers 
tried  to  keep  back  the  money  as  long  as  possible  and  to 
use  it  to  their  own  advantage.  When  an  inquiry  into 
the  management  of  the  public  money  was  made  in  1780 
it  was  found,  for  example,  that  the  receivers  of  the  land 
tax  had  in  their  possession  balances  to  the  amount  of 
£657,000  out  of  yearly  receipts  of  £2,500,000.  The 
alleged  reason  for  this  was  the  difficulty  of  obtaining 
good  bills  of  exchange  and  the  inadequacy  of  the  pay, 
which  according  to  the  old  rate  was  2d,  for  every  £i 
collected.  People  were  forced  to  use  the  money  for  their 
own  purposes  in  order  to  secure  a  competence.^  Besides, 
these  balances  also  served  sometimes  to  meet  liabilities 
incumbent  upon  them. 

The  expenses  which  the  revenue  offices  had  to  meet 
consisted    partly    in    their    own    costs    of    management, 

o  "Treasury  Papers,"  171 1,  Vol.  CXL,  No.  4. 

&  First  report  of  the  commission  of  public  accounts,  1780. 


157 


National      Monetary       Commission 

partly  in  expenditure  authorized  by  law  on  behalf  of 
other  branches  of  the  public  servdce.  The  former  were 
fixed  by  law  or  by  royal  order,  and  were  allowed  by  the 
Treasury  accordingly;  in  the  latter  case  the  act  grant- 
ing the  money  generally  provided  that  the  receipts  of 
this  head  of  revenue  should  be  registered  separately 
from  all  others  by  the  revenue  officers  and  should  be 
regularly  devoted  to  certain  specified  payments.  This 
led  to  direct  transactions  between  the  different  public 
services  for  which  these  payments  were  to  be  made  and 
the  revenue  offices,  which  transactions  must  however 
always  rest  on  a  definite  legal  basis.  Hence  when  the 
accounts  of  the  revenue  offices  were  audited  on  the 
account  side  of  the  Exchequer,  the  quittances  for  the 
money  paid  in  to  the  receipt  side  had  to  be  checked, 
and,  in  addition,  the  use  made  of  the  remaining  money 
had  to  be  inquired  into  and  compared  with  the  provisions 
of  the  corresponding  act  of  Parliament.  On  the  receipt 
side  only  the  net  receipts  of  the  public  revenue  were 
accumulated. 

The  procedure  there,  which  was  of  importance  in 
regard  to  the  transference  of  the  business  connected 
with  the  public  money  to  the  Bank,  was  based  for  the 
later  period  upon  8  and  9  Will.  Ill,  c.  28,  1698;  but  this 
act  only  confirmed  in  essentials  the  system  in  use  from 
ancient  times. <^     The  different  receivers  of  the  revenue 

o  It  is  entitled:  "An  act  for  the  better  observance  of  the  course  anciently 
used  in  the  receipt  of  the  Exchequer."  For  the  older  procedure  see 
Gneist,  whose  account  follows  Thomas's  book  referred  to  above.  The 
actual  administration  during  the  eighteenth  and  at  the  beginning  of  the 
nineteenth  centur>-  is  described  in  detail  in  the  "Report  on  the  Ex- 
chequer," P.  P.,  1 83 1,  431  and  the  "Return  on  Public  Income  and  Expend- 
iture," P.  P.,   1869,  336  I,  p.  338  et  seq. 

158 


The     English     Banking     System 

paid  their  money,  within  the  above-mentioned  inter- 
vals of  time,  to  one  of  the  four  tellers,  each  of  whom 
was  concerned  with  the  receipt  of  a  specified  branch  of 
revenue.  The  teller  then  sent  a  slip  of  parchment,  the 
"teller's  bill,"  upon  which  the  amount  received  was 
specified  to  the  so-called  tally  court.  There  the  bill 
was  received  by  the  clerk  of  the  pells  and  entered  in  his 
book  of  introitus,  or  receipt.  A  similar  entry  was  made 
by  a  clerk  of  the  auditors  of  receipt  in  the  bill  of  the  day. 
Finally  a  copy  of  the  teller's  bill  was  made  by  marking 
the  name  of  the  person  paying  in  the  money,  the  head 
of  the  receipt,  the  amount  and  the  date,  upon  the  tally. 
This  certification  of  the  payment  (solutum)  was  called 
a  tally  of  sol,  and  was  given  next  day  to  the  person 
who  had  paid  in  the  money.  At  the  end  of  the  day  the 
bill  of  the  day  was  again  sent  to  the  clerk  of  the  pells, 
who  now  entered  all  the  receipts  of  the  day  in  a  cash 
book.  The  book  called  Introitus  appears  to  have  been 
a  ledger,  the  entries  in  which  were  valid  outside  the  office — 
e.  g.,  at  the  audit  of  accounts  before  the  Court  of  the 
Exchequer  ("  it  is  held  to  be  evidence  in  courts  of  law  ") — 
the  cash  book  was  only  for  use  in  the  office.  It  served 
as  a  check  on  the  tellers,  who  had  to  account  for  the 
sums  entered  therein.  The  custody  of  the  public  money 
was  intrusted  to  the  clerk  of  the  pells  and  the  chamber- 
lain (in  later  times  to  the  auditor  of  the  receipt)  in  con- 
junction with  the  tellers.  At  the  end  of  each  day  the 
cash  in  hand  was  examined  by  them,  or  rather  by  their 
clerks,  and  compared  with  the  amounts  in  the  cash  book. 
The  teller  had  to  render  account  by  means  of  vouchers 


159 


National      Monetary       Commission 

(orders  of  bills  of  assignment  regularly  issued)  of  the  way 
in  which  the  difference  had  been  disposed  of. 

(j)    The  right  of  assignment. 

The  receipts  from  all  the  heads  of  revenue  were  paid 
into  one  central  treasury,  but  they  were  not  regarded 
as  a  single  fund,  out  of  which  money,  as  it  came  in,  could 
be  used  for  the  public  expenses  without  regard  to  the 
object  of  the  payments.  Each  separate  head  of  revenue 
was  charged  with  definite  payments,  and  the  different 
subheads  into  which  any  head  of  revenue  might  be  divided 
were  regarded,  either  each  by  itself,  or  several  together, 
as  distinct  funds.  Thus,  for  example,  the  customs 
duties  for  one  year  were  divided  into  no  less  than  74 
subheads,  according  to  which  the  receipts  of  the  customs 
and  the  payments  charged  thereon  were  reckoned. 
Thus  instead  of  one  large  balance  in  hand,  there  were  a 
dozen,  since  the  surplus  under  one  head  could  not  be 
applied   to   meet    the   deficit    under   another. 

Attempts  at  consolidation  began  with  the  increase 
of  the  public  debt,  the  receipts  from  various  taxes  being 
united  to  pay  the  interest  and  for  the  redemption  of  the 
debt.  No  less  than  six  such  funds  were  formed  between 
1697  and  1 7 10.  Their  union  into  a  single  fund  followed 
in  1 715  and  in  this  way  all  the  payments  arising  out  of 
the  management  of  the  debt  were  in  some  sort  charged 
on  a  single  fund.  For  in  practice  the  separation  in  book- 
keeping of  the  receipts  and  expenditure  had  had  the 
same  effect  as  if  there  had  been  so  many  distinct  funds. 
The  system  of  separate  funds  was  continued  for  the 
remaining  branches  of  the  public  serv^ice  until  1786, 
when   the   consolidated   fund   was   formed. 

160 


The     English     Banking'     System 

Although  the  pubUc  money  in  the  Exchequer  was 
assigned  in  this  way  to  different  objects,  there  was  only 
one  authority  competent  to  order  its  issue.  As  soon 
as  the  revenues  are  paid  into  the  Exchequer  the  King 
alone  can  dispose  of  them,  they  become  Crown  property. 
The  "King's  taxes,"  the  "King's  revenue"  are  the 
expressions  used  in  the  laws.  The  King  orders  the  issue 
of  the  money  by  means  of  the  great  seal  or  the  privy 
seal,<^  warrants  under  which  are  sent  to  the  treasurer, 
or  rather  to  the  lords  commissioners,  the  chancellor  of 
the  exchequer,  and  under  treasurer.  The  warrants  are 
executed  by  the  orders  of  these  persons.  Originally 
this  was  done  by  word  of  mouth,  but  since  the  office  was 
put  into  commission  it  has  been  done  by  a  written  war- 
rant signed  by  three  or  more  of  the  lords  commissioners. 
This  warrant  instructs  the  auditor  of  the  receipt  to  issue 
an  order  of  payment  to  one  of  the  tellers.  It  refers 
to  the  royal  warrant  and  states  the  funds  out  of  which 
the  money  is  to  be  paid.  The  oldest  forms  of  these 
orders  which  survived  till  more  modern  times  were 
called  "debentures."  They  were  payable  at  sight. 
In  addition  however  to  these  there  were  orders  of  pay- 
ment, which  had  to  be  signed  at  the  Treasury  again 
before  they  were  honored  and  which,  since  Charles  II 's 
reign,  must  be  accompanied  by  a  letter  of  direction  or 
issuing  letter.  The  salaries  of  the  officers  of  the  Exchequer 
and  payments  made  at  the  special  direction  of  the  Privy 

»"These  (great  seal)  are  the  methods  whereby  the  King's  pleasure  is 
to  be  known  for  the  issuing  of  money."  (Speech  of  Lord  Keeper  Somers 
in  support  of  his  judgment  on  the  Bankers'  Case,  12  Will.,  III.)  See 
Howell,  "State  Trials,"  London,  1812,  vol.  15.  This  speech  is  celebrated 
on  account  of  the  learning  with  which  it  describes  the  history  and  func- 
tions of  the  Exchequer. 

68299°— II II  161 


National      Monetary       Commission 

Council  were  excepted  from  this  clumsy  procedure  and 
could  be  made  on  the  authority  of  a  simple  warrant 
from  the  Treasury. 

The  King's  liberty  to  dispose  of  the  money  in  the  Ex- 
chequer was  limited  after  William's  time  owing  to  the 
appropriation  by  Parliament  of  the  taxes  voted,  which 
appropriation  became  the  regular  procedure.  In  the  dis- 
position of  these  revenues  the  Crown  had  a  definite  com- 
mission to  execute.  "  The  Crown  becomes  a  trustee  either 
for  the  public  uses  and  services  to  which  the  money  is 
appropriated  or  for  the  interest  of  the  public  creditors 
who  have  a  property  in  the  several  duties  and  revenues 
purchased  by  them  upon  the  faith  of  public  credit  and 
the  authority  of  acts  of  Parliament."'^  Hence  a  distinc- 
tion grew  up  between  the  appropriated  funds,  the  money 
voted  for  the  service  of  the  current  year,  and  that  voted 
for  the  expenses  of  the  civil  list.  In  the  case  of  heads  of 
revenue  permanently  appropriated  for  definite  objects — 
e.  g.,  for  the  redemption  of  debt — payment  was  made 
through  the  auditor  without  a  royal  rescript,  on  the 
authority  merely  of  a  treasury  order  citing  the  act  of 
Parliament  in  question.  The  latter  condition  was  often 
dispensed  with  in  the  cases,  which  were  both  frequent 
and  important  during  the  eighth  century,  where  credit 
was  employed.  The  individual  creditors  sometimes  re- 
ceived a  treasury  repayment  order  when  the  loan  was 
raised,  or  the  obligation  to  repay  was  legally  regulated 
and  connected  with  the  bills  issued,  without  the  inter- 
vention of  the  Treasury. 

o  Robert  Walpole.  "  Draught  of  an  Intended  Vindication  of  Sir  R.  W. 
by  Himself"  in  "Memoirs  of  Sir  Robert  Walpole,"  by  William  Coxe, 
London,  1788.     Bk.  III. 

162 


The     English     Banking     System 

The  issue  of  the  money  voted  for  the  service  of  the 
current  year  was  made  by  warrant  under  the  privy  seal, 
the  warrant  was  kept  within  the  hmits  of  a  possible 
appropriation  and  was  executed  by  the  Treasury. 

The  assignments  for  the  expenses  of  the  civil  list  were 
made  in  the  form  anciently  in  use,  until  the  restoration, 
after  which  the  procedure  was  shortened.  Instead  of 
continually  making  new  orders  under  the  great  and 
privy  seals  for  the  regularly  recurrent  payments  (expenses 
of  the  household,  salaries  of  civil  servants,  etc.)  the  King 
issued  rescripts  in  each  of  these  forms  which  served  as 
standing  authorizations  to  the  Treasury  to  assign  money 
for  certain  heads  of  expenditures,  or  at  any  rate  simpli- 
fied the  assignment.  The  provision  of  these  letters 
patent  dormant  or  privy  seals  dormant  is  usually  one  of 
the  first  ways  in  which  the  King  exercises  his  authority. 
In  the  case  of  letters  patent  under  the  great  seal  the 
clause  runs  thus:  the  Treasury  is  requested  to  pay 
"such  sum  or  sums  of  money  as  to  you  shall  seem  reason- 
able and  fit  to  be  allowed  and  paid  in  such  cases";  in  the 

case  of  letters  of  privy  seal:  "that  you  pay  such 

sum  or  sums  of  money  for  any  public  or  particular  uses 
and  services  as  we  by  any  warrant  or  warrants  imder  our 

royal  sign  manual  shall  direct  to  be  paid."     In 

the  latter  case  a  special  order  of  payment  from  the  King 
was  also  required,  but  it  was  supplied  in  the  more  con- 
venient form  of  an  order  under  the  royal  sign  manual. 
Thus  the  Treasury  had  only  an  indirect  right  of  assign- 
ment, whence  the  duty  of  the  auditors  of  the  receipt  to 
see  that  its  orders  agreed  with  the  royal  warrant  or  with 
the  act  of  Parliament.     The  importance  of  the  royal  right 


163 


N  ational      Monetary       Commission 

of  assignment  diminished  with  the  growing  custom  of 
appropriating  the  taxes  as  they  were  voted,  and  became 
eventually  a  formality  which  was  preserved  as  part  of  the 
traditional  fiction  that  the  Crown  alone  has  the  right  to 
dispose  of  taxes. 

Hence  a  strict  centralization  of  the  system  of  pay- 
ment was  necessary  and  this  constitutes  the  real  impor- 
tance of  the  right  of  assignment  vested  in  the  Crown,  so 
far  as  it  concerns  administration  of  public  money. 

{4)  The  administration  of  money  by  the  pay  departments. 

With  the  exception  of  the  payments  made  by  the 
collectors  and  receivers,  all  money  was  issued  through 
the  Exchequer.  The  issues  consisted  partly  of  actual 
payments,  partly  of  the  transfer  of  public  money  with  a 
view  to  further  employment  and  to  be  subsequently  ac- 
counted for.  To  the  first  belonged  part  of  the  salaries 
of  civil  servants,  pensions,  royal  bounties,  and  the  pay- 
ment of  interest  on,  and  the  capital  of,  certain  debts. 
To  the  second  belonged  the  remainder  of  the  payments 
to  civil  servants  and  all  expenses  for  the  army,  the 
details  of  which  were  managed  by  the  treasurer  of  the 
household,  and  the  paymaster  of  the  forces,  respectively. 
The  payments  made  to  the  household  need  hardly  be  con- 
sidered in  connection  with  the  development  of  the  ad- 
ministration of  public  money.  Not  only  were  they 
unimportant  in  themselves,  but  they  received  little 
attention.  The  civil  administration  was  the  business  of 
the  Crown,  but  Parliament  imdertook  the  administration 
of  the  army  through  its  grants  of  the  annual  supplies. 
The  moneys  assigned  to  the  purpose  were  "public  moneys" 


164 


The     English     Banking     System 

in  the  strict  sense.  The  greater  part  of  the  pubHc  debt  was 
incurred  in  this  department  and  hence  the  management  of 
the  money  devoted  to  it  was,  throughout  the  eighteenth 
century,  the  special  object  of  parHamentary  inquiry.«^ 

According  to  the  oldest  Government  balance  sheet 
extant  the  issues  for  the  Custodia  of  England  in  1421 
amounted  to  £46,286  out  of  total  payments  of  £62,236.^ 
In  1660  the  proportion  was  £1,013,000  for  army  and 
navy,  against  £42,400  for  other  expenses.''  During 
James  II's  reign  the  average  for  three  years  (1685  to 
1688)  was  £1,111,839  for  army  expenses,  £587,524  for 
other  expenses.*^  In  the  first  three  years  of  William  and 
Mary's  reign  (1688  to  1691)  the  army  expenses  were 
£8,957,299  as  against  £1,792,149  for  the  civil  adminis- 
tration.^ During  the  succeeding  years  and  especially 
under  Anne,  the  expenses  for  the  army  and  navy  became 
so  heavy  that,  for  example,  in  Anne's  reign  the  average 
proportion  was  £5,591,329  :  £749,656.     These  were  war 

o  These  inquiries  began  as  early  as  1666  when  the  first  commission  was 
appointed  "to  examine  all  accounts  of  those  who  have  received  or  issued 
money  for  this  war."  In  1691  we  find  commissioners  for  taking  the  public 
accounts,  out  of  which  only  the  accounts  of  the  army  were  subjected  to 
an  inquiry.  Under  the  same  title  in  1701,  1703  (Paymaster  Ranelagh 
expelled  from  the  house),  171 1  (impeachment  of  Marlborough),  17 12  (im- 
peachment of  Robert  Walpole  as  treasurer  of  the  navy),  17 13  (the  com- 
mission of  inquiry,  of  the  previous  year,  into  the  accounts  of  the  army, 
prolonged),  1726  (inquiry  into  the  state  of  the  public  debt),  1746  (inquiry 
into  the  state  of  the  land  and  marine  forces).  The  most  important  of  the 
committees  appointed  to  inquire  into  the  whole  question  of  the  adminis- 
tration of  public  finance  were  those  of  1780  and  1797. 

ö  Printed  in  Hatsell  "  Precedents,"  vol.  3,  Ap.  3,  also  in  Rymer's 
"Foedera,"  Vol.  X,  pp.  113,  114.  The  receipts  were  £55,754  los. 
lo^d,  the  issues  £62,235  i6s.  lo^d. 

cCobbett,  "Parliamentary  History,"  1806,  vol.  4,  p.  118. 

t^Cobbett,  loc.  cit.,  vol.  5,  p.  189. 

e  These  and  the  following  figures  are  taken  from  the  annual  public 
accounts  given  in  the  "Returns  on  Public  Income  and  Exj^enditure"  from 
1688  to  1869. 

16s 


National      Monetary       Commission 

years,  but  even  after  a  long  period  of  peace  (1738)  the 
proportion  was  still  £1,780.000  :  £880,000.  This  was  the 
lowest  point  of  the  expenditure  on  the  army  and  navy. 
After  this  it  rose  again,  until  toward  the  end  of  George 
II's  reign  (1760)  it  reached  £13,500,000,  as  against  an 
outlay  of  £1,150,000  on  the  civil  administration.  Under 
George  III  the  expenditure  on  the  army  in  time  of  peace 
was  three  times  that  on  the  civil  administration,  while 
in  time  of  war  the  former  rose  to  £20,000,000,  £26,000,000, 
£28,000,000,  and  even  £41,000,000,  against  £2,500,000 
for  the  latter. 

Most  of  the  expenses  for  the  civil  administration  were 
paid  through  the  Exchequer.  It  can  hardly  be  supposed 
that  the  treasurer  of  the  household  attained  much  impor- 
tance in  this  connection.  On  the  contrary  the  develop- 
ment of  English  financial  management  may  be  said  to 
be  influenced  only  by  the  procedure  evolved  in  the  adminis- 
tration of  the  forces  combined  with  that  which  grew  up 
in  the  Exchequer.  The  administration  of  the  forces  was 
early  divided  into  the  services  of  the  army,  the  navy, 
and  the  ordnance.  The  votes  in  Parliament,  as  well  as 
the  assignments  of  public  money  for  the  administration 
of  the  forces,  were  made  under  these  three  heads.  Each 
of  these  services  had  a  head  pay  office  which  received 
from  the  Exchequer  the  portion  of  public  revenue  voted 
or  otherwise  assigned  to  the  service  in  question,  carried 
out  the  detailed  expenditure,  and  rendered  accounts  for 
the  whole  amount.  The  three  offices  were  that  of  the 
paymasters-general  of  the  forces,  that  of  the  treasurer  of 
the  navy,  and  that  of  the  treasurers  of  the  ordnance. 
The  pay  offices  of  the  two  hospitals  of  Greenwich  and 


166 


The     English     Banking     S  y  s  t  e 


m 


Chelsea  were  added  to  these  in  the  eighteenth  century. 
The  principle  of  complete  independence  in  the  application 
and  employment  of  the  public  moneys  held  good  for  the 
pay  offices  as  well  as  for  the  receipt  offices. 

The  charge  of  public  money  entailed  the  duty  of  ren- 
dering accomits,  but  the  money  passed  into  the  possession 
of  the  paymaster  who  was  charged  with  it,  and  he  was 
only  answerable  for  applying  it  in  accordance  with  the 
acts  of  Parliament  or  with  special  instructions  received. 
His  whole  property  was  liable  for  any  neglect  of  duty. 
His  heirs  and  legal  successors  inherited  this  liability  and 
it  only  ceased  when  his  accounts  had  been  examined  and 
discharged  by  the  auditors  of  imprest  and  he  had  received 
his  quietus.  He  was  the  accredited  agent  for  the  prop- 
erty of  the  State.  He  received  his  instructions  by  an 
order  from  the  public  authorities.  He  was  discharged 
after  giving  evidence  that  he  had  carried  out  these  instruc- 
tions in  accordance  with  the  legal  provisions  and  the 
established  customs,  public  money  was  advanced  to  him 
in  order  that  he  might  so  carry  them  out,  and  for  this 
money  he  had  to  present  accounts. 

It  might  happen  that  either  the  paymasters  had  to 
make  good  in  case  the  proof  of  correct  application  were 
unsatisfactory  or,  on  the  other  hand,  that  they  might  claim 
the  repayment  of  money  to  themselves.  They  were  allowed 
to  make  payments  for  which  they  had  received  no  money 
but  were  not  obliged  to  do  so.'^ 

o  The  position  of  the  paymasters  is  described  in  the  numerous  Reports 
on  public  accounts  already  referred  to,  which  were  issued  by  Parliament 
in  the  course  of  the  eighteenth  century.  The  advantages  and  disadvan- 
tages of  the  system  were  brilliantly  described  by  Burke,  in  a  speech  on 
February  ii,  1780.  Cobbett,  "Parliamentary  History, "  vol.  21,  p.  i 
et  seq. 

167 


National      Monetary      Commission 

The  paymasters  were  usually  persons  of  high  rank, 
members  of  the  House  of  Commons  or  belonging  to  the 
leading  families  in  the  country.  This  gave  some  security 
for  the  exact  performance  of  their  duties.  We  shall, 
however,  have  occasion  to  notice  later  the  dangers  to 
public  property  which  this  system  entailed.  In  general 
it  may  be  said  that  the  rule  which  prevailed  throughout 
the  English  financial  system  of  independent  personal  ad- 
ministration of  the  public  money  by  the  receipt  and  issue 
offices  had  the  undesired  result  that  people  used  for  pri- 
vate ends  the  money  which  they  were  supposed  to  ad- 
minister in  the  public  interest.  It  was  a  temptation  to 
the  officials  to  keep  large  balances  in  order  to  enjoy  the 
interest  on  them,  and  in  this  way  the  State  was  deprived 
of  profit;  moreover,  the  way  in  which  the  presentation 
of  accounts  was  managed  led  to  confusion  and  insecurity 
as  to  the  position  of  the  finances  and  resulted  in  actual 
loss. 

In  the  eighteenth  century  the  originally  arbitrary 
assignment  of  the  issues  for  the  administration  had 
already  grown  into  a  systematic  division,  according  to 
estimates  as  between  the  different  objects  of  expendi- 
ture, of  the  money  voted  in  large  sums.  Estimates  had 
indeed  been  made  before«  with  regard  to  the  internal 

a  Thus  as  early  as  1433  the  lord  high  treasurer,  Ralph,  Lord  Cromwell, 
laid  three  "establishments"  before  ParHament  "showing  the  particulars 
of  the  whole  revenues  and  profits  of  the  Crown  with  the  charge  out  of 
them."  Cobbett,  "Parliamentary  History,"  vol.  i,  July  8,  1433.  This 
was  repeated  frequently  in  the  seventeenth  century.  Thus  the  lord  chan- 
cellor presented  estimates  on  June  18,  1625,  which  contained:  (i)  The 
estate  the  late  King  left.  (2)  The  estate  the  King  now  stands  in.  (3) 
How  it  will  be  in  the  future.  The  last  division  is  divided  into  10  sub- 
divisions, specifying  the  claims  for  unpaid  debts,  outstanding  payments  of 
subsidies,  and  the  army.     Cobbett,  loc.  cit. 

168 


The     English     Banking     System 

objects  of  the  financial  administration,  and  the  exact 
development  of  the  whole  system  of  accounts  in  the 
Exchequer  points  to  their  existence;  but  it  does  not 
appear  how  far  they  served  as  the  basis  for  expenditure. 
From  the  time  of  William  and  Mary  onward  the  votes  in 
Parliament  were,  however,  based  upon  estimates,  and  also 
the  money  so  voted  was  assigned  to  the  public  offices  in 
accordance  with  these  estimates." 

The  expenditure  on  the  administration  of  the  forces 
alone  was  the  object  of  a  special  vote  in  Parliament, 
while  for  the  permanent  expenses  of  the  civil  service  the 
Exchequer  was  supplied  with  permanent  assignments; 
consequently  the  making  of  estimates  and  the  subsequent 
division  of  supplies  according  to  the  estabhshments  corre- 
sponding to  these  estimates  were  confined  to  the  navy, 
the  army,  and  the  ordnance.  The  paymaster  and  treas- 
urer made  their  claims  to  the  Treasury  in  the  course  of 
the  year  on  the  basis  of  the  establishments,  in  order  that 
they  might  dispose  of  portions  of  the  sums  assigned  to 
them.  The  Treasury  obtained  the  royal  warrant  for 
this,  and  the  payment  followed  according  to  the  pro- 
cedure of  the  Exchequer.  The  paymaster  of  the  forces, 
until  1758,  used  to  receive  a  third  of  the  amount  for  the 
year  every  four  months,  subsequently  he  received  from 

o  This  is  shown  by  the  regular  presentation  of  estimates  and  accounts 
to  ParUament,  which  estimates  are  given,  some  by  Cobbett,  some  in  the 
reports  of  the  commissions  of  inquiry  referred  to  above.  Thus  Robert 
Walpole  in  his  "  Letter  to  a  Friend  Concerning  the  Public  Debts,  Particu- 
larly that  of  the  Navy,  1712"  (Lord  Somers's  "Tracts,"  Vol.  XIII,  "The 
Debts  of  the  Nation,  Stated  and  Considered"),  says  that  in  the  case  of 
the  land  service  "estimates  of  the  whole  expense  are  given  in  to  the 
Parliament;  according  to  those  estimates  the  respective  sums  are  granted 
and  pursuant  to  them  establishments  are  made,  regulating  the  whole 
expense  of  the  army  and  subject  to  no  alteration  or  enlargement." 

169 


N  ation  al      Monetary       Commission 

time  to  time  the  sums  required  for  payment.  The  treas- 
urer of  the  ordnance  obtained  the  money  for  the  ordnance 
services  every  month. 

The  paymaster's  claims,  at  least  during  the  second  half 
of  the  century,  were  accompanied  by  a  statement  of  the 
special  head  of  the  service  to  which  the  money  was  to  be 
applied  and  were  examined  by  the  auditor  of  the  receipt 
to  see  whether  the  sum  demanded  by  the  paymaster  was 
within  the  credit  allowed  him  by  the  Treasury  and  whether 
the  latter  was  in  accordance  with  the  parhamentary  grant. 
But  it  was  not  within  the  province  of  either  the  Treasury 
or  the  auditor  to  inquire  whether  there  was  need  for  the 
transfer  of  the  money  at  the  time  when  it  was  demanded. 

The  way  in  which  the  money  was  assigned  and  ac- 
counted for  may  be  examined  more  closely  in  connection 
with  the  pay  office  of  the  paymaster-general  of  the  forces. 

As  soon  as  the  supplies  had  been  voted  by  Parliament 
the  secretary  for  war  sent  various  establishments  to  the 
paymaster-general  of  the  forces.  These  stated  the  allot- 
ment of  the  sum  voted  among  the  various  regiments, 
corps,  and  garrisons  for  officers  and  privates  per  day  and 
year.  At  the  same  time  a  royal  sign  manual  was  obtained 
by  the  Treasury  which  authorized  it  to  make  over  money 
from  time  to  time  to  the  paymaster-general,  out  of  the 
money  voted  for  the  army  by  way  of  imprest,  and  upon 
account. 

This  sign  manual  was  discharged  by  a  treasury  warrant 
and  an  order  from  the  auditor  of  the  receipt,  and  after  it 
had  been  registered  by  the  paymaster  was  deposited  in 
the  Exchequer.  The  paymaster  was  credited  through  the 
sign  manual  with  the  amount  of  the  sum  specified  therein, 


170 


I 


The     English     Banking     System 

which,  however,  was  only  used  through  the  intermediacy 
of  the  Treasury.  He  stated  the  desired  amount  and  the 
object  of  expenditure  to  the  Treasury,  and  received  from 
it  an  issuing  letter  by  means  of  which  he  obtained  the 
money  required.  This  continued  until  the  credit  was 
exhausted.  Then  a  new  sign  manual  was  obtained,  and 
so  on.  The  last  of  the  sums  remaining  out  of  the  parHa- 
mentary  grant  was  issued  under  a  privy  seal  which  con- 
tained in  addition  a  confirmation  of  all  the  sums  previ- 
ously received.  Provided  that  the  stated  objects  of 
expenditure  corresponded  to  the  establishments,  the  Treas- 
ury raised  no  objection.  The  paymaster  kept  a  cash 
book  in  which  were  entered  all  the  sums  received  from 
the  Exchequer  and  any  other  receipts  (profits  from  bills 
of  exchange,  deductions  from  salaries,  etc.).  He  rendered 
accounts  of  the  expenditure  which  he  had  made,  which 
accounts  were  kept  separate  both  for  each  object  of 
expenditure  and  for  each  year.  Payments  were  made 
on  the  basis  of  the  accounts  until  the  sum  voted  for  that 
particular  object  was  exhausted.  The  accounts  referred 
to  the  payments  made  "for  the  services  of  the  year," 
not  for  those  made  during  the  year.  Thus,  with  each 
year  fresh  accounts  were  opened  and  the  former  ones 
lapsed.  A  paymaster's  accounts  were,  however,  never 
completely  discharged  unless  either  the  total  sum  allotted  to 
him  had  been  expended  or  the  object  of  expenditure  no  longer 
existed.  The  payments  on  his  accounts  continued  even  if 
he  were  no  longer  in  office.  Hence  he  and  his  family 
retained  the  balance  of  cash  for  years  and  were  also  per- 
manently accountable  and  liable  for  millions. 


171 


H 


National      Monetary       Commission 

It  was  the  same  in  the  other  pay  offices.  In  the  pay 
office  for  the  navy  the  balance  was  further  increased  by 
the  fact  that  the  money  which  was  assigned  to  each  sepa- 
rate object  was  kept  distinct.  Hence  there  might  be  a 
surplus  in  one  case,  while  another  object  for  which  there 
was  temporarily  nothing  assigned  that  was  available 
remained  unprovided  for. 

Moreover  it  was  an  old  custom  of  the  Exchequer,  based 
on  an  act  of  51  Henry  III  (1266),  that  no  one  should  be 
received  to  account  until  the  accounts  of  his  predecessor 
had  been  discharged.** 

Suits  between  the  paymasters  and  their  subaccount- 
ants,  inevitable  difficulties  of  collecting  the  vouchers  for 
accounts  of  payments  which  had  to  be  made  in  all  parts 
of  the  world,  and  the  slow  procedure  in  the  Exchequer 
itself,  each  delayed  the  examination  of  accounts,  so  that 
the  liability  of  the  paymasters  often  continued  for  decades 
after  their  retirement,  and  throughout  this  time  they  were 
obliged  to  have  some  balance  in  hand  to  free  themselves 
and  their  families  from  continual  fear  of  a  claim  for  com- 
pensation.^ 

The  commission  of  1780  demonstrated  clearly  that  the 
public  money  was  not  managed  in  accordance  with  public 
interests.     Although  its  reports  were  at  first  only  a  state- 

o  The  act  runs:  "That  when  a  sheriff  or  bailili  hath  begun  his  accounts, 
none  other  shall  be  received  to  account  until  he  that  was  first  appointed 
hath  clearly  accounted  and  that  the  sum  has  been  received."  (Burke's 
speech  on  financial  reform,  Feb.  11,  1780.)  Cobbett  loc.  cit.  vol.  21,  p.  i, 
et  seq. 

b  Thus  the  elder  Pitt,  Earl  of  Chatham  who  had  retired  from  his 
office  of  paymaster-general  of  the  forces  in  1755,  in  spite  of  strenuous 
efforts  and  the  prestige  of  his  subsequent  position  as  minister,  only  received 
his  quietus  thirteen  years  later.  (Fox,  speech  in  Parliament,  June  ii, 
1781.)     Cobbett,  "Parliamentary  History,"  vol.  z.. 


172 


The     English     Banking     System 

ment  of  facts  which  the  officers  of  the  Treasury  must  have 
known  anyhow,  they  became  ultimately  the  basis  of  all 
reforms  in  the  management  of  the  public  money  and 
accounts."  The  account  given  in  these  reports  of  the 
relation  between  the  pay  officers  and  the  administration 
of  the  public  moneys  corresponds  with  what  we  have 
already  stated  in  general  form,  and  this  is  illustrated  by 
the  following  examples : 

Lord  Holland,  who  had  resigned  his  office  of  paymaster 
general  of  the  forces  in  1765,  had  received  £64,000,000 
during  his  time  in  office.  In  consequence  of  the  pay- 
ments which  continued  to  be  made  on  his  accounts  after 
his  resignation,  the  auditors  of  imprest  did  not  examine 
these  accounts  until  1776.  In  1780  they  were  still  undis- 
charged and  since  he  had  died  meanwhile,  his  heirs  were 
liable  in  his  stead.  The  average  cash  balance  in  his  pos- 
session amounted  to  £450,000.  The  interest  on  the 
balance  which  remained  in  his  hands  after  his  retirement 
was  reckoned  at  £250,000.  His  four  next  successors, 
who  meanwhile  had  themselves  retired  also,  could  present 
no  accounts  until  his  were  settled.  The  profit  from 
interest — i.  e.,  the  loss  to  the  State — on  their  balances  was 
estimated  at  £290,000.  Paymaster  Rigby,  who  had  held 
the  office  since  1768,  had  had  in  hand  since  this  time  an 
average  balance  of  £453,000.  For  shorter  periods  larger 
sums  were  of  course  held,  thus  Rigby  during  the  last  nine 

ß  The  commission  as  appointed  by  Lord  North  was  non-parliamentary. 
Burke,  however,  praised  its  reports  thus:  "As  pieces  of  Hterary  compo- 
sition he  never  saw  style  and  manner  so  happily  united  to  a  subject — clear, 
correct,  nervous,  and  intelligible."  After  Lord  North's  fall  the  commission 
was  strengthened  by  parliamentary  members  and  became  the  chief  stimu- 
lus to  financial  reform. 


173 


N ation  al      Monetary      Commission 

months  had  had  on  the  average  £870,000.  In  the  pay 
office  of  the  navy  the  payments  and  accounts  of  four 
treasurers  were  still  running  on  together.  The  first  of 
these  had  come  into  office  in  1759,  so  that  the  accounts 
for  twenty-two  years  remained  unsettled  and  the  balances 
were  still  in  the  hands  of  the  respective  paymasters. 

In  the  case  of  accounts  which  were  examined  so  long 
after  the  payments  had  been  made  it  was  often  out  of  the 
question  to  obtain  proof  of  such  payment.  Large  sums 
had  to  be  noted  as  unaccounted  for  and  payment  enforced 
by  legal  means  if  the  Crown  were  not  to  suffer  loss.  Thus 
since  1720,  £473,000  had  stood  to  the  account  of  the  Earl 
of  Lincoln  as  paymaster  general  of  the  forces.  There 
was,  however,  nothing  in  the  Exchequer  books  referring 
to  the  payment  of  the  sum  nor  had  the  heirs  any  evidence 
of  payment,  and  they  indeed  declared  and  proved  that  they 
had  received  nothing.  Viscount  Falkland,  treasurer  of  the 
navy,  or  rather  his  legal  heirs,  had  been  £27,000  in  arrears 
since  1689.  It  may  well  be  understood  that  awakened 
public  opinion  regarded  the  great  paymasters  as  "  robbers  " 
and  "plunderers,"  "enriching  themselves  with  the  spoils 
of  the  people."«  The  evil  was  not  remedied  until  the 
administration  of  the  public  money  was  transferred  to  the 
Bank,  and  it  was  one  of  the  causes  which  combined  to 
bring  about  such  a  transference. 

a  Robert  Walpole  had  complained  that  people  spoke  of  the  "  publick 
ministers"  in  these  terms.  "Draft  of  an  Intended  Vindication  of  Sir  Rob. 
Walpole,"  by  himself  (Walpole  Papers  in  Coxe,  "  Memoirs  of  Sir  Robert 
Walpole").  Particularly  serious  accusations  were  made  against  Lord 
Holland  "the  grand  defaulter  of  unaccounted  millions."  See  the  parlia- 
mentary debates  for  March  8,  1780.  Cobbett  "Parliamentary  History," 
vol.  21. 


174 


The     English     Banking     System 

(5)   The  transactions  between  the  public  offices  and  the  Bank. 

Owing  to  the  entire  independence  of  the  public  pay- 
offices  as  regards  the  expenditure  and  application  of  the 
public  money,  no  connection  between  the  administration 
of  public  money  and  the  Bank  was  possible  except  by  a 
radical  change  in  the  principles  on  which  the  offices  were 
managed.  The  first  step  was  to  unite  the  public  treasury 
with  the  Bank.  Such  a  policy  had  not  been  foreseen 
when  the  Bank  was  founded.  Nor  were  any  legal  measures 
taken  for  the  purpose  during  its  subsequent  existence. 
It  must  be  remembered  that  such  an  alteration  in  the 
financial  administration  signified  the  abolition  of  the 
Exchequer.  The  procedure  of  the  latter  was  indeed  com- 
plicated and  its  business  methods  difficult,  but  its  customs 
had  grown  up  in  the  course  of  centuries  and  use  made 
them  appear  a  safe  method  of  administering  the  public 
finances.  The  right  of  the  Crown  to  dispose  of  the  public 
revenue,  the  entire  system  of  account  keeping,  and  in  par- 
ticular the  system  of  borrowing,  were  closely  connected 
with  this  procedure,  which  was  moreover  bound  up  with 
the  management  of  the  different  offices  in  the  Exchequer; 
hence  the  abolition  of  this  central  treasury  and  the  crea- 
tion or  remodeling  of  a  single  large  bank  depot  was  impos- 
sible. Such  vigorous  reforms,  which  destroy  what  is 
customary  at  a  blow,  have  never  been  undertaken  by  the 
English  Government  at  any  time  or  in  regard  to  any 
department  of  the  administration.  Moreover,  the  Gov- 
ernment was  least  of  all  likely  to  contemplate  a  reform  of 
its  financial  system  at  the  time  when  the  Bank  was  founded, 
a  time  when  every  effort  was  needed  to  maintain  a  financial 
system,  which  was  threatened  with  chaos  by  the  currency 

175 


National      Monetary       Commission 

reform  and  the  overburdening  of  the  pubhc  revenue  by- 
floating  debts.  The  existing  connection  between  the 
Bank  and  pubhc  finance  is  thus  a  gradual  growth,  bound 
up  with  the  different  changes  made  in  the  business  meth- 
ods of  the  Exchequer  and  with  the  development  of  the 
management  of  public  money  by  the  receipt  and  issue 
offices.  And  when  the  time  came  to  regulate  this  con- 
nection by  act  of  Parliament  it  was  merely  necessary  to 
give  legal  sanction  to  a  relationship  which  had  already 
grown  up  in  fact. 

The  Bank  had  indeed  been  early  concerned  with  the 
„carrying  out  of  public  monetary  transactions.  Its  con- 
cern was,  however,  at  first,  not  with  the  Exchequer  but 
with  the  receipt  and  issue  offices.  These  offices  endeav- 
ored to  make  profit  out  of  the  government  money  which 
they  had  in  hand  so  long  as  it  was  under  their  control, 
and  hence  it  was  natural  that  they  should  look  around  for 
a  bank  with  which  they  could  deposit  the  money.  The 
Bank  made  various  efforts  to  secure  these  private  deposits 
of  public  money.  It  repeatedly  requested  the  Treasury 
to  influence  the  paymasters  and  receivers  to  keep  their 
cash  with  it.«  In  December,  171 1,  it  complained  that 
"Some  public  offices  kept  their  cash  with  others  and  not 
with  the  Bank,  and  that  the  greatest  part  of  the  receiv- 
ers transacted  their  affairs  in  other  places,  which  ought 
to  cultivate  a  good  understanding  with  the  Bank  from 
the  frequent  services  done  them."*     The   services   thus 

o  "Treasury  Papers"  (record  office),  Vol.  CXVII,  23.  In  1709  it 
granted  an  advance  to  Sir  Henry  Furness,  the  paymaster  general  of  the 
forces,  but  begged  him  to  keep  his  cash  with  it.  In  1712  the  same  thing 
happened  in  regard  to  the  treasurer  of  the  navy.  "Minute  Book,"  Vol. 
XVII,  p.  121. 

Ö  "Treasury  Papers,"  Vol.  CXL,  4. 

176 


The     English     Banking     System 

referred  to,  apart  from  the  large  advances  made  to,  and 
the  loans  which  the  Bank  raised  for,  the  Government,  are 
no  doubt  the  advances  which  it  made  to  the  different 
offices.  The ' '  Treasury  Papers ' '  record  numerous  instances 
of  such  loans,  which  were  made  by  the  Bank,  on  security 
of  the  usual  bills,  to  the  offices  of  the  paymaster  of  the 
forces  and  the  treasurers  of  the  navy  and  ordnance. 
According  to  the  records  extant,  these  were  in  some  cases 
made  through  the  Treasury,  which  negotiated  with  the 
governor  of  the  Bank.«  In  other  cases  the  paymaster, 
after  having  applied  to  the  Treasury,  received  from  it  an 
order  to  hand  over  to  the  Bank  a  number  of  the  bills 
issued  by  the  Exchequer  and  to  receive  from  it  the  sum 
required.^  The  interest  was  agreed  upon  for  each  case 
separately ;  <=  and  the  amounts  were  regularly  repaid  in  a 
short  time,  with  interest.  It  sometimes  happened  that  the 
Bank  refused  an  advance  of  this  nature.«^  The  Treasury 
and  the  Bank  were  completely  independent  of  one  another. 
During  the  eighteenth  century  the  connection  between 
the  Bank  and  the  public  offices  grew  continually  closer. 
It  was,  however,  not  the  only  financial  institution  with 
which  business  was  transacted.  The  elder  Pitt  for 
example,  when  he  was  paymaster  general,  kept  his  cash 
partly  with  the  Bank  of  England,  partly  with  other  banks.* 
But  it  is  noteworthy  that  all  other  banks  were  known  as 
"private"  banks.     And  when  in  178 1  the  renewal  of  the 

o  As  in  both  the  cases  quoted. 

b  "Treasury  Papers,"  1709,  Vol.  CXLVII  7;   171 1,  Vol.  XLVII,  7. 

c  In  1712  the  rate  of  interest  was  6  per  cent  and  corresponded  to  the 
current  rate  on  the  public  debt. 

d  "Treasury  Papers,"  1706,  Vol.  XCIX,  58;   1709,  Vol.  CXIV,  26. 

«Fox,  Speech  in  House  of  Commons,  June  17,  1781  (Cobbett,  "Parlia- 
mentary History,"  vol.  21). 

68299° — II 12  177 


National      Monetary       Commission 

Bank  Charter  was  discussed,  °  Mr.  Ewer,  the  governor  of 
the  Bank,  was  able  to  say  that  "  the  pubHc  were  by  far  the 
best  customers  the  Bank  had."  Its  credit,  its  power 
of  accommodating  government,  arose  solely  from  its 
being  the  cashier  of  the  pubHc*  Lord  North  called  the 
Bank  "the  public  exchequer."  But  it  was  expressly 
stated  that  although  nearly  all  the  paymasters  kept  their 
cash  at  the  Bank,  they  could  at  any  moment  withdraw  it 
and  place  it  with  a  private  banker.  The  Bank  acted 
merely  as  a  banker  and  the  relation  between  the  public 
offices  and  the  Bank  was  no  more  than  that  between  a 
private  person  and  his  banker. 

But  by  this  time  it  had  relations  with  the  State  which 
were  not  confined  simply  to  the  deposits  of  cash  by  the 
receipt  and  issue  offices.  At  the  beginning  of  the  eight- 
eenth centur}'  the  use  of  bank  notes  as  currency  had 
become  a  universal  practice.  The  Exchequer,  or  rather 
its  cashiers,  the  tellers,  found  themselves  in  possession  of 
a  large  number  of  these  notes  every  day.  They  were, 
however,  liable  for  the  balance  of  their  money  in  cash, 
and  hence  were  obliged  to  present  these  notes  immediately 
to  the  Bank,  in  order  cither  to  obtain  cash,  or  to  be  assiued 
that  the  notes  were  genuine.  Possibly  the  receipt  for  a 
payment  in  notes  was  not  given  until  such  assurance  was 
received.  On  the  other  hand  the  custom  had  grown  up, 
as  early  as  the  second  decade  of  the  eighteenth  century, 

a  Cobbett,  "Parliamentary  History,"  vol.  22,  debate  of  June  13,  1781. 

b  According  to  the  statement  of  the  commissioners  on  public  accounts 
the  following  kept  their  cash  with  the  Bank  at  that  time:  customs,  excise, 
stamp,  post  and  salt  offices,  the  various  receivers  of  the  land  tax,  the 
paymaster  general  of  the  forces,  the  treasurer  of  the  navy,  and  the  treasurer 
of  the  ordnance.     Si.xth  report,  1781,  Ap.  68. 


178 


The    English     Banking    System 

owing  to  the  adoption  as  a  form  of  currency  of  government 
paper  credit — the  exchequer  bills — of  anticipating  the 
receipts  of  certain  taxes  (land  tax,  malt  tax,  sugar  duty) 
by  an  advance  from  the  Bank  on  the  security  of  such 
\  exchequer  bills,  which  advance  was  paid  back  as  the  taxes 
came  in.  In  return  for  bank  notes  or  coin,  a  corresponding 
number  of  exchequer  bills  were  given  back.  In  time  also 
the  Bank  had  other  claims,  for  the  payment  of  the  interest 
and  the  management  of  the  pubUc  debt  owed  either  to  itself 
or  to  other  creditors,  and  for  the  cashing  of  bills  of  ex- 
change, etc.  The  paymasters  who  kept  their  cash  with 
the  Bank  had  the  money  transferred  to  it;  the  receipt 
offices  which  had  deposits  there  or  had  bills  of  exchange 
on  it,  drew  money  from  it.  Hence  it  was  the  center  of  a 
great  part  of  the  system  of  public  payments,  each  stage 
in  which  (unless  it  was  a  payment  from  a  paymaster  to  a 
private  individual  third  person)  had  to  be  notified  to  the 
Exchequer,  in  order  that  the  book  entries  which  were 
needed  for  the  public  accounts  might  be  made.  In  this 
way  business  relations  grew  up  between  the  Bank  and 
the  Exchequer  which  for  a  later  period  (the  end  of  the 
century)  are  described  as  follows:« 

One  or  more  clerks  from  the  Bank  are  in  daily  attend- 
ance at  the  Exchequer.  The  person  paying  in  the  money 
deposits  it  with  one  of  the  bank  clerks,  from  whom  he 
receives  a  ticket  stating  the  receipt,  the  name  of  the  person 
paying  in  the  money,  and  the  head  of  revenue  upon  which 

o  "Journals  of  the  House  of  Lords,"  Vol.  XLI  (36  Geo.,  Ill)  p.  196. 
Inquiry  into  the  loans  made  by  the  Bank  to  the  Government.  Interroga- 
tion of  the  head  cashier  of  the  Bank.  "  Report  of  the  Commissioners  of 
Public  Accounts,  On  the  Exchequer,"  P.  P.  1 831,  313.  (Evidence  of  differ- 
ent officers  of  the  Exchequer,  of  the  revenue  offices,  and  of  the  Bank). 


179 


N  ational      Monetary       Commission 

it  is  paid.  This  ticket  he  takes  to  the  teller's  office  where 
he  himself  registers  the  payment  in  a  book.  This  entry- 
is  checked  by  the  teller  and  compared  with  the  ticket,  a 
copy  of  which  he  then  sends  to  the  tally  court.  If  the 
person  paying  in  the  money  has  an  accomit  at  the  Bank 
he  previously  obtains  from  the  latter  bank  notes,  rendered 
unusable  for  ordinary  circulation,  for  sums  of  £i  ,000  each. 
At  the  end  of  the  day  a  reckoning  is  made  by  the  tellers 
and  the  bank  clerks,  the  payments  to  be  made  by  the 
Bank  are  compared  with  the  money  received  and  the 
difference  is  paid.  This  payment  is  likewise  made  with 
these  "  cancelled  "  bank  notes  if  it  exceeds  £1,000.  Ex- 
chequer bills  for  a  like  amount  can  also  be  used.  Small 
sums  are  paid  in  coin.  When  the  Bank  has  a  larger  pay- 
ment to  make  to  the  Exchequer — e.  g.,  in  consequence  of  a 
loan — this  too  is  made  with  these  cancelled  bank  notes  or 
with  exchequer  bills.  These  were  only  pass  tickets  which 
were  transferred  hither  and  thither  as  evidence  of  credits 
or  debits,  and  to  serve  as  a  visible  basis  for  the  entries  at 
the  Exchequer.  Hence,  the  transactions  in  coin  at  the 
Exchequer  were  very  small.  In  1797  they  amounted  to 
between  £50,000  and  £60,000  a  day. 

It  is  most  probable  that  this  procedure  was  established 
long  before  the  time  when  the  Bank  legally  took  over,  or 
rather  was  charged  with,  certain  receipts  and  issues.  The 
report  of  1797  speaks  of  it  as  existing  "  time  out  of  mind,  " 
and  that  of  1831  remarks  that:  " For  nearly  a  century  the 
Bank  of  England  has  sent  down  to  the  Exchequer  persons 
duly  authorized  to  examine  and  receive  its  own  notes." 
Also  9  Anne,  c.  7,  1710,  provides  that  exchequer  bills,  not 
exceeding  50  in  nimiber,  shall  be  issued  for  £5,000  each; 


180 


The     English     Banking     S  y  stem 

which  bills  "  shall  be  current  only  as  payments  between  the 
Exchequer  and  the  Bank  of  England."  It  may  indeed  be 
supposed  that  these  payments  were  only  made  on  account 
of  the  loans  which  the  Bank  had  at  that  time  already 
begun  to  raise,  and  of  the  obligation  of  the  Government 
to  pay  interest  to  the  Bank  and  to  cash  the  short-date 
bills  which  were  in  the  latter' s  possession.  As  early  as 
1 7 IG  the  Bank  raised  a  lottery  loan  for  the  Government« 
and  the  floating  debt  which  was  paid  off  in  the  course  of 
the  year  amoimted  to  over  £3,000,000,^  for  a  large  part 
of  which  the  Bank  was  certainly  the  creditor. 

The  current  payments  into  and  withdrawals  from  the 
Bank  on  the  part  of  the  receipt  and  issue  offices  may  thus 
have  grown  out  of  the  kind  of  financial  transactions  which 
arose  between  the  Bank  and  the  Exchequer  owing  to  the 
system  of  raising  loans;  and  this  to  an  increasing  extent 
as  the  Bank  came  to  act  more  and  more  as  a  depository 
of  cash  for  these  offices.  But  when  most  of  the  actual  pay- 
ments were  undertaken  by  the  Bank  it  seemed  natural  not 
to  give  the  money  to  the  tellers  merely  in  order  that  they 
might  hand  it  over  to  the  Bank  after  they  had  subtracted 
from  it  the  balance  required  for  their  own  use,  but  rather 
to  pay  it  direct  to  the  Bank,  which  made  payments  for 
the  tellers  and  reckoned  with  them.  Probably,  however, 
the  old  relation  was  maintained.  Exchequer  bills,  and, 
later,  bank  notes,  were  kept  in  the  tellers'  chest,  corre- 
sponding to  the  sum  which  stood  to  their  credit  at  the 
Bank;  and  if  the  Exchequer  had  a  payment  to  make,  it  did 
this  in  fact  by  handing  over  to  the  Bank  such  bills  or  notes. 

o  8  Anne,  c.  4. 

&Cf.  "Ret.  Nat.  Debt,"  p.  4. 


181 


National      Monetary       Commission 

Perhaps  the  exchange  of  exchequer  bills  and  bank  notes 
may  be  traced  back  directly  to  the  fact  that  the  Bank  was 
originally  a  creditor  of  the  Government.  It  possessed 
the  government  bills.  If  the  Government  received  money 
it  gave  it  to  the  Bank  and  redeemed  its  debt.  Later, 
when  the  Bank  received  payments,  it  became  the  debtor 
of  the  Government.  It  gave  up  its  notes,  and  if  the  Gov- 
ernment made  a  payment  through  it  the  notes  were 
returned. 

The  date  when  this  change  occurred  can  not  be  deter- 
mined. Between  1710,  when  the  first  large  issue  of  ex- 
chequer bills  took  place,  and  1780,  when  the  procedure 
was  fully  developed,  seventy  years  had  passed  during 
which  the  Government  had  entered  into  the  closest  con- 
nection with  the  Bank,  mainly  through  the  development 
of  the  public  debt.  The  reason  why  no  legal  regulation 
of  the  administration  of  public  money  was  made  dur- 
ing these  years  may  be  that  this  administration  had 
grown  to  a  desired  simplicity  through  the  freedom  of 
action  allowed  to  the  pay  offices.  It  is  true  that  the 
management  of  the  public  money  was  not  legally  handed 
over  to  the  Bank,  but  the  tellers  had  in  fact  transferred 
their  chest  to  it,  and  managed  their  payments  through  it. 
The  great  paymasters  had  done  the  same  thing.  The 
final  step  which  the  Government  had  to  make  was  to 
declare  that  all  such  deposits  in  the  hands  of  the  Bank 
were  public  deposits.  The  transformation  of  the  Ex- 
chequer into  a  mere  office  for  keeping  accounts  and  of  the 
offices  of  the  paymasters  into  mere  offices  for  assign- 
ment, necessarily  followed  from  this. 


182 


The     English     Banking     System 

PART  III. 

THE  LEGAL  DEVELOPMENT  OF  THE  RELATIONS  BETWEEN 
THE  BANK  AND  THE  ADMINISTRATION  OF  THE  PUBLIC  DEBT 
AND  PUBLIC  MONEY. 

I.    THE    BANK    AND    THE    ADMINISTRATION    OF    THE    PUBUC 

MONEY. 

(i)   The  reforms  in  the  administration  of  public  money 
between  ijSo  and  1834. 

The  financial  disturbance  due  to  the  American  war 
and  the  bad  administration  of  the  North  ministry  led 
toward  the  end  of  the  eighth  decade  of  the  eighteenth 
century  to  a  general  demand  for  a  reform  in  the  expen- 
sive and  insufficient  financial  organization,  especially 
with  regard  to  the  Exchequer  and  its  dependent  treas- 
uries. Burke  gave  eloquent  expression  in  Parliament 
to  this  need  in  a  speech  on  February  1 1 ,  1 780,  and  ex- 
panded his  statement  into  a  scheme  for  an  important 
financial  reform.«  Most  of  the  reforms  in  financial  ad- 
ministration which  were  carried  out  during  the  next 
fifty  years  owed  their  origin  to  this.  Burke's  project 
made  appeal  for  a  simplification  of  the  Exchequer  and 
of  the  highly  paid  offices  connected  with  it,  which  offices 
had  become  mere  sinecures;  for  parliamentary  control 
of  the  civil  list,  and  the  introduction  of  definite  heads  of 
service  for  the  civil  administration;  for  the  appropria- 
tion of  funds  for  that  portion  of  the  civil  administration 
which  had  not  hitherto  been  under  parliamentary  control; 
and  for  a  reform  of  the  pay  offices  of  the  army  and  navy. 
In  describing  the  latter  he  referred  to  the  relations  of 

o  Cobbett,  "Parliamentary  History,"  vol.  21,  p.  i  et  seq. 
^^3 


National      Monetary       Commission 

the  paymaster  and  treasurer  to  the  Bank.  The  method 
of  assigning  money  to  the  paymaster  of  the  forces  and  the 
treasurer  of  the  navy  must  cease  since  it  injured  the 
State  and  unjustly  enriched  private  persons.  The  money 
must  no  longer  be  paid  to  them  but  to  the  Bank,  and  they 
must  make  their  payments,  with  the  exception  of  those 
for  small  expenses,  by  drafts  on  the  Bank.  Both  Bank 
and  pay  offices  must  keep  accounts  which  were  to  be 
made  up  and  audited  at  the  end  of  the  year.  The  balance 
remaining  was  to  be  carried  over  to  the  next  year,  and 
when  a  paymaster  retired,  was  to  be  transferred  to  his 
successor.  In  return  for  the  profits  made  out  of  the 
employment  of  the  public  mone}^  the  Bank  must  under- 
take "the  charge  of  the  mint "  and  " the  charge  of  remit- 
tances to  our  troops  abroad."  If  the  Bank  would  not 
consent  to  this  the  Treasury  was  to  negotiate  with  any 
other  banker  of  repute.  "There  is  no  banker,  who  will 
not  be  at  least  as  good  a  security  as  any  paymaster  of 
the  forces  or  any  treasurer  of  the  navy,  that  has  ever 
been  banker  to  the  public." 

The  "establishment  bill,"  which  embodied  these  re- 
forms, was  thrown  out  by  Parliament.  But  it  led  at 
any  rate  to  the  appointment  of  a  commission  to  inquire 
into  the  financial  administration,  and  after  Lord  North's 
fall  in  the  following  year,  the  new  ministry,  in  which 
Burke  was  appointed  paymaster  of  the  forces,  began,  al- 
though very  cautiously,  to  carry  out  reforms  on  the 
basis  of  the  report  of  the  commission. 

The  Exchequer  was  first  dealt  with.  Here  the  chief 
advantage  of  the  reforms  was  not  a  change  in  organiza- 


184 


The     English     Banking     System 

tion,  but  the  fixing  of  definite  salaries.«^  In  1783  the 
office  of  chamberlain  was  suppressed,  and  it  was  pro- 
vided that  instead  of  talHes,  the  auditor  of  the  receipt 
and  the  clerk  of  the  pells  should  give  indented  cheque 
receipts.''  Two  years  later  the  audit  office  of  the  audi- 
tors of  imprest  was  abolished  and  in  their  stead  com- 
missioners for  auditing  the  public  accounts  were  ap- 
pointed, whose  duties,  though  no  more  extensive,  were 
definitely  organized. '^  Otherwise  the  receipt  side  of  the 
Exchequer  continued  to  exist  for  some  decades,  with  all 
its  formalities,  and  with  the  fiction  that  the  government 
money  was  collected  in  its  chests,  although  in  actual  fact 
the  tellers'  chest  had  been  transferred  to  the  Bank. 

The  moneys  of  the  paymaster  general  of  the  forces, 
on  the  other  hand,  were  transferred  to  the  Bank  in  lySß,*^ 
and  this  was  soon  followed  by  a  similar  change  with 
regard  to  the  navy  and  ordnance  offices.  From  this 
time  onward  each  pay  office  had  an  account  at  the  Bank 
through  which  sums  were  made  over  to  it  and  out  of 
which  its  payments  were  made.  But  the  conditions  under 
which  Burke  had  proposed  to  hand  over  the  administra- 
tion of  public  money  to  the  Bank  were  never  imposed. 

«■The  incomes  of  the  persons  holding  offices  in  the  Exchequer  had 
reached  an  unexampled  amount,  which  was  made  up  almost  entirely  from 
fees.  Thus  in  1780  the  auditor  had  £19,930;  each  of  the  tellers,  £9,954; 
the  clerk  of  the  pells,  £9,543  ("6th  Report,  Com.  Publ.  Ace,"  1780).  On 
the  account  side  the  income  of  an  auditor,  for  example,  amounted  to 
£15,000  a  year  ("8th  and  12th  Rep.").  The  actual  work  was  done  by 
the  deputies  of  the  officers  mentioned.  The  officers  were  deprived  of  the 
right  to  appoint  deputies  by  23  Geo.  Ill,  c.  82,  by  which  act  also  fixed 
salaries  were  assigned   to  them. 

&  23  Geo.  Ill,  c.  82.  The  tallies  were  not  finally  abolished  until  the 
retirement  of  the  last  chamberlain  in  1826. 

c  25  Geo.  Ill,  c.  52. 

Ö  23  Geo.  Ill,  c.  50. 

18s 


National      Monetary       Commission 

No  profits  accrued  to  the  Government,  neither  was  any 
indemnity  demanded  by  the  Bank.  The  Bank  was 
still  making  the  same  tacit  use  of  the  deposits  when,  in 
1806,  its  relations  with  the  receivers-general  were  defi- 
nitely regulated.«  The  excise,  stamp,  post,  and  customs 
offices  were  ordered  to  pay  into  the  Bank  all  moneys 
received  by  them,  with  the  exception  of  small  sums, 
fixed  in  amount  by  law,  which  might  be  retained  for 
current  expenses.  The  account  of  each  office  was  kept 
in  the  name  of  the  receiver-general  concerned,  who  alone 
could  dispose  of  the  money.  This  act  also  recognized 
to  some  extent  the  custom  which  had  grown  up  in  the 
practice  of  the  Exchequer  of  making  fictitious  transfers 
from  the  public  treasury  to  the  Bank.  The  payments 
of  the  balances  in  the  bands  of  the  receivers  into  the 
Exchequer  was  continued,  but  the  act  expressly  instructed 
the  receivers-general  to  draw  out  the  money  at  the  times 
specified  in  the  instructions — i.  e.,  to  receive  "cancelled 
bank  notes,"  and  to  pay  these  into  the  Exchequer,  or, 
as  it  might  happen,  to  hand  them  over  to  the  bank  clerk 
attending  there  on  behalf  of  the  teller.  The  clerk  brought 
the  notes  back  again  to  the  Bank.  In  spite  of  its  com- 
plexity this  procedure  continued  unaltered  until  1834. 

During  the  period  which  elapsed  between  the  regu- 
lation of  the  receipt  and  issue  offices  and  the  transference 
of  the  public  treasury  to  the  Bank  a  custom  arose,  which 
was  due  partly  to  the  concentration  of  the  revenue  at  the 
Bank,  but  whose  original  cause  dates  from  a  much  earlier 
time.  This  was  the  organization  of  those  loans  from 
the   Bank  to  the  Government  which  were   intended  to 

046  Geo.  Ill,  c.  75,  76,  83,  100. 
186 


The     English     Banking     System 

cover  temporary  excess  of  expenditure  over  income, 
arising  during  a  given  financial  period,  when  the  total 
expenditure  during  this  period  was  covered  by  notes  of 
supply.  Even  in  George  II's  reign  it  had  become  usual 
for  the  Bank  to  place  each  year  at  the  disposal  of  the 
Treasury,  to  be  used  as  required  and  when  convenient, 
a  sum  in  anticipation  of  the  land  and  malt  taxes,  which 
sum  was  specified  in  the  act  granting  these  taxes  and  was 
advanced  on  the  security  of  exchequer  bills;  it  was  paid 
off  in  the  course  of  the  year  as  the  receipts  for  these 
taxes  came  in.  The  annual  renewal  of  the  taxes  and  of 
the  authorization  of  this  loan  from  the  Bank  made  this 
running  credit  allowed  to  the  Government  at  the  Bank 
play  an  important  part  in  the  administration  of  the  public 
moneys,  and  the  more  so  considering  the  amount  of  the 
receipts  from  the  taxes.  This  credit  did  not,  however, 
afford  the  security  of  a  regular  cover  for  any  cash  deficit 
that  might  arise.  The  formation  of  the  consolidated 
fund  in  1787  was  of  importance  in  developing  a  relation 
of  this  kind. 

The  disadvantages  of  the  system  of  separate  funds 
had  been  pointed  out  in  1785  by  the  commissioners  of 
public  accounts,  who  had  suggested  the  formation  of  a 
single  fund  into  which  all  the  public  revenues  should  be 
paid  and  out  of  which  all  public  expenses  should  be  met." 
This  proposal  led  to  the  formation  of  the  consolidated 
fund  by  27  Geo.  Ill,  c  13.  A  portion  of  the  permanent 
taxes  was  united  under  this  name  and  was  earmarked 
for  permanent  expenditure,  such,  for  example,  as  the 
interest  on  the  public  debt.     But  the  receipts  covering 

o  13th  report. 
187 


National      Monetary      Commission 

the  civil-list  expenses  were  still  kept  distinct  as  was  also 
the  revenue  from  taxes  voted  annually.  The  receipts 
forming  the  consolidated  fund  might  only  be  used  for 
the  purposes  to  which  they  had  been  expressly  assigned 
by  Parliament.  With  the  exception  of  the  interest  on 
the  public  debt  these  were  mainly  the  payment  of  pen- 
sions and  of  such  expenses  of  the  civil  service  as  were  not 
already  provided  for  in  the  civil  list.  The  distinction 
between  those  expenses  of  the  civil  list  which  concerned 
public  administration  and  the  personal  income  allowed 
yearly  to  the  sovereign,  the  civil  hst  in  the  continental 
sense,  was  first  made  in  1830,  at  which  date  these  ex- 
penses were  already  charged  upon  the  consolidated  fund. 
From  this  time  onward  there  remained  only  the  fund 
and  the  annual  supplies. 

When  the  consolidated  fund  was  formed  it  was  chiefly 
applied  to  meet  quarterly  expenses  of  a  permanently 
recurring  type.  The  act  establishing  it  provided  that, 
at  the  end  of  each  quarter,  no  money  was  to  be  issued 
from  the  fund  until  a  sufficient  sum  had  been  set  apart 
to  cover  the  specified  quarterly  charges.  It  was  hoped 
in  this  way,  as  far  as  possible,  to  retain  the  receipts 
assigned  to  make  up  the  fund  until  the  end  of  the  quarter. 
Should  there  be  a  deficit  it  was  made  good  out  of  the 
annual  supplies  for  that  year.  A  surplus  was  "applied 
in  the  first  instance  to  replace  advances  to  make  good 
the  deficiency  of  a  previous  quarter,  and  then  as  Parlia- 
ment might  determine."  This  system  had  the  serious 
disadvantage  that  "the  surplus  income  of  one  quarter 
could  not  be  made  available  to  cover  the  deficiencies  of  a 
previous  quarter  until  the  termination  of  the  quarter  in 


The     English     Banking     System 

which  such  surplus  might  arise."  "'  This  defect  was 
remedied  in  1817  by  57  Geo.  Ill,  c.  48,  which  act  author- 
ized the  Treasury  to  cover  a  deficit  in  the  consoHdated 
fund  by  borrowing  from  the  Bank  on  the  security  of 
exchequer  bills.  These  exchequer  bills,  usually  called 
"deficiency  bills,"  were  paid  off  in  the  coiwse  of  the 
quarter  in  which  they  were  issued,  being  discharged  by 
degrees  as  the  revenue  forming  the  fund  was  paid  in. 

A  similar  plan  was  adopted  to  cover  any  deficiency 
that  might  arise  in  the  supplies  voted  yearly — the  ways 
and  means.  The  malt  and  sugar  taxes  which  were  voted 
yearly  had  for  a  long  time  been  assigned  to  this  purpose, 
and  "it  was  the  practice  to  include  in  the  act  granting 
them  a  provision  for  raising  money  by  the  issue  of  Ex- 
chequer Bills  charged  upon  these  duties,  and  thus  to  pro- 
vide funds  for  making  good  any  temporary  deficiency  of 
these  Ways  and  Means  to  meet  current  Supply  charges."  ^ 
These  so-called  malt  or  sugar  bills  could  then  be  used  to 
meet  a  temporary  deficit.  This  practice  was  altered  in 
1830.  An  act,  II  Geo.  Ill,  c.  2,  then  provided  that  a 
sum  should  be  assigned  out  of  the  consolidated  fund  as 
"Ways  and  Means  for  the  Service  of  the  year,"  on  such 
a  plan  that  exchequer  bills  might  be  issued  up  to  the 
amount  so  assigned  and  might  be  "charged  on  the  grow- 
ing produce  of  the  Consolidated  Fund  in  the  next  succeed- 
ing quarter  to  that  in  which  they  were  issued."  The 
Bank  of  England  was  authorized  to  make  such  loans  to 
the  Government,  from  time  to  time,  as  the  needs  of  the 
supply  services   required   and   the   exchequer   bills  were 

«"Report  on  Public  Income  and  Expenditure,"  i86g,  366,  p.  519. 
&  Ibid.,  p.  520. 


189 


National      Monetary       Commission 

handed  over  to  the  Bank,  which  advanced  the  necessary 
sums.  These  ways  and  means  bills  resemble  the  deficiency 
bills,  "except  that  they  were  made  payable  out  of  the 
growing  produce  of  the  Consolidated  Fund  in  the  following 
quarter,  and  the  money  raised  upon  them  was  appli- 
cable to  Supply  Services  only."  Their  issue  has  continued 
since  1830  in  the  way  described." 

These  temporary  advances  from  the  Bank  to  the 
Government  appear  in  the  form  of  an  unfunded  debt. 
Had  they  been  nothing  further  they  could  not  claim 
much  importance.  But  they  differed  fundamentally  from 
the  other  temporary  loans  which  the  Bank  made  to  the 
Government  at  the  end  of  the  eighteenth  and  beginning 
of  the  nineteenth  centuries.  They  can  not  be  looked 
upon  merely  as  unfunded  debt.  The  reason  for  their 
existence  is  to  be  found  in  certain  operations  in  the 
management  of  the  public  moneys,  which  were  regularly 
carried  out  in  this  way.  They  led  to  organized  and  regu- 
larly recurring  transactions  between  the  Bank  and  the 
Government,  which  transactions  prepared  the  way  for  a 
complete  transference  of  the  management  of  public  money 
to  the  Bank. 

{2.)   The  union  of  the  public  treasury  with  the  Bank  {1834). 

Notwithstanding  the  attempts  to  reorganize  the  special 
offices  and  various  points  in  the  managment  of  the  public 
money,  the  Exchequer  itself,  although  the  object  of 
repeated  complaints,  had  undergone  no  complete  reforma- 
tion.    Its  existence  was  no  longer  justified.     Its  actual 

«For  the  arrangement  of  these  advances  from  the  Bank  to  the  Govern- 
ment cf.  "Report  on  PubHc  Income  and  Expenditure,"  1869,  366,  i,  pp. 
519  and  520. 


I  go 


The     English     Banking     S  y  s  tern 

functions  were  to  direct  the  Bank  to  transfer  public 
money  to  the  paymasters,  or  to  carry  out  such  payments 
as  were,  in  accordance  with  custom,  made  by  it;  to  check 
the  assignments  made  by  the  Treasury,  and  to  keep  the 
pub  He  accounts,  though  it  did  not  audit  the  returns 
made  by  the  accountants,  which  business  had  been  in- 
trusted to  a  separate  audit  office  as  early  as  1786.  These 
functions  required  no  such  official  apparatus  and  com- 
plicated procedure  as  were  still  retained.  During  the 
thirties  this  gave  rise  to  continual  demands  for  changes. 
In  1830  a  commission  was  appointed  to  inquire  into 
"the  charges  of  managing  and  collecting  the  Public 
Revenue,"  and  this  was  followed  in  1831  by  a  commis- 
sion to  "examine  into  the  practice  of  the  Exchequer 
with  respect  to  the  Receipt  and  Payment  of  the  Public 
Money  and  the  mode  of  keeping  the  Accounts  thereof."«^ 
This  latter  commission  presented  its  report  in  the  same 
year.^  Its  proposals  became  law  and  the  receipt  side 
of  the  Exchequer  was  entirely  remodeled  by  4  Will.  IV, 
c.  15  (May  22,  1834). 

The  offices  of  the  auditor,  the  clerk  of  the  pells,  and 
the  tellers  and  the  "offices  subordinate  thereto"  were 
abolished,  compensation  being  paid  to  those  holding 
them  at  the  time,  and  the  public  moneys  were  to  be  paid 
into  the  Bank  to  the  account  of  the  Exchequer.  The 
former  exchequer  staff  was  replaced  by  the  following 
officers : 

o  Thomas,  loc  cit.,  p.  29. 

b  The  minutes  of  evidence,  documents,  and  proposals  of  the  connnission 
appointed  on  July  8,  1831,  are  contained  in  the  "Report  on  the  Exchequer," 
P.P.,  1831,313. 


191 


National      Monetary      Commission 

(i)  The  comptroller-general  of  the  receipt  and  issue  of 
His  Majesty's  Exchequer.  The  comptroller  had  an  assist- 
ant comptroller  and  various  other  officers  under  him.  He 
exercised  the  combined  powers  of  the  auditor  and  of  the 
clerk  of  the  pells.  He  kept  the  books  and  records  referring 
to  the  receipts  and  expenditures.  All  orders  for  issuing 
public  money  rnust  pass  through  his  hands  and  be  regis- 
tered by  him.  He  must  satisfy  himself  that  such  orders 
were  in  conformity  with  the  royal  order  or  with  the  par- 
liamentary grant.  He  had  direct  control  over  the 
exchequer  account  at  the  Bank,  and  presented  accounts 
himself  to  the  Treasury. 

(2)  The  Bank  of  England.  The  Bank  undertook  the 
duties  of  the  tellers.  It  received  the  public  moneys  and 
managed  the  issues  under  the  warrant  of  the  comptroller. 
It  was  responsible  to  the  comptroller  and  to  the  Treasury. 

(3)  The  paymaster  of  the  civil  services.  A  single  pay- 
master was  appointed  by  the  Treasury  to  make  such  pay- 
ments as  had  hitherto  been  "payable  in  detail  at  the 
Exchequer,"  viz.,  salaries,  allowances,  pensions,  etc.  These 
payments  were  all  connected  with  the  civil  service,  since 
the  army  already  possessed  its  own  paymaster-general. 
The  paymaster  of  the  civil  services  and  his  subordinates 
had  no  independent  position  but  constituted  a  department 
of  the  Treasury. 

The  principles  adopted  for  the  management  of  the  pub- 
lic money  were  as  follows: 

(i)  All  moneys  payable  to  the  Government  were  paid 
into  the  l^ank  cither  directly  or  through  the  intermediacy 
of  the  receivers. 


19a 


The     English     Banking     System 

(2)  All  public  money  held  by  the  Bank  was  to  form  a 
single  fund  known  as  the  "account  of  His  Majesty's 
Exchequer."  But  separate  accounts  were  to  be  kept  for 
the  public  offices  corresponding  to  the  separate  services. 

(3)  The  exchequer  account  was  available  to  the  comp- 
troller-general only  and  he  employed  the  same  on  the 
receipt  of  warrants  from  the  Treasury,  which  warrants 
must  rest  either  on  an  order  under  the  royal  sign  manual 
or  a  grant  of  Parliament. 

The  paying  in  of  money  was  accompanied  by  duplicate 
specifications  or  statements  of  the  particulars  thereof, 
which  had  been  countersigned  by  the  comptroller.  One 
of  these  duplicates  was  signed  by  the  cashier  receiving  the 
money  for  the  Bank,  the  other  was  retained  by  the  Bank. 
At  the  close  of  the  day  the  Bank  transmitted  the  specifica- 
tions received  to  the  comptroller,  and  sent  a  copy  to  the 
Treasury  as  a  statement  of  the  money  received  by  it,  the 
issuing  of  which  was  now  managed  by  a  new  method  of 
assignment. 

The  distinction  between  appropriation,  supply,  and 
civil  list  services  had  already  been  simplified,  through  the 
formation  of  the  consolidated  fund,  into  a  division  between 
the  expenses  charged  to  this  fund  and  those  not  so  charged. 
But  w^hen  the  old  exchequer  offices  were  abolished  and  the 
comptroller-general  was  appointed,  the  method  by  which 
this  assignment  proceeded  was  changed.  The  issue  of 
money  for  the  consolidated  fund  services  was  made  by  the 
Bank  on  the  authority  of  an  exchequer  warrant  from  the 
comptroller-general,  who  was  in  his  turn  empowered  by  a 
treasury  warrant  referring  to  the  act  of  Parliament  by 
wliich  the  expenditure  in  question  was  assigned  to  the 

68299°— II 13  193 


National      Monetary       Commission 

consolidated  fund.  The  assignment  of  money  for  the 
supply  services  was  based  upon  a  procedure  specified  in 
detail  by  4  Will.  IV,  c.  15,  the  stages  of  which  were  as 
follows : 

(i)  The  annual  supplies  are  granted  to  the  Crown  by 
the  House  of  Commons  in  committee  of  supply  and  placed 
at  the  disposal  of  the  Treasury  by  a  special  act — the  ways 
and  means  act. 

(2)  The  Crown  transfers  to  the  Treasury  the  right  of 
making  issues  of  public  money  by  royal  order,  which 
empowers  the  comptroller  of  the  Exchequer  to  assign  the 
whole  amount  of  each  separate  vote  under  the  direction  of 
the  treasurer, 

(3)  The  Treasury  authorizes  the  comptroller  by  warrant 
from  time  to  time  to  issue  exchequer  warrants,  and  by 
these  to  empower  the  Bank  to  place  at  the  disposal  of  a 
paymaster  the  full  amount  of  any  separate  vote.  This 
procedure  constitutes  the  general  basis  for  the  credit 
allowed  to  the  paymasters  at  the  Bank.  In  order  that 
this  may  be  used — 

(4)  The  Treasury  instructs  the  comptroller  from  day 
to  day  to  authorize  the  Bank  to  place  at  the  disposal  of  the 
paymaster  the  sums  demanded  by  the  latter. 

(5)  The  comptroller  then  issues  the  warrant  correspond- 
ing to  this  demand,  and 

(6)  The  Bank  finally  withdraws  the  required  sum  from 
the  total  revenues  entered  to  the  exchequer  account  and 
transfers  it  to  the  accotmt  of  the  paymaster. 

No  fundamental  alteration  was  really  made  by  these 
provisions.  Instead  of  the  separate  appropriations 
hitherto  usual,  the  greater  part  of  the  expenditure  was 


194 


The     English     Banking     S  y  stem 

now,  once  for  all,  appropriated  to  the  consolidated  fund. 
The  inclusion  of  the  civil  list  expenses  in  this  appropria- 
tion was  a  fundamental  extension  of  the  right  of  appro- 
priation, but  did  not  alter  the  right  of  assignment  which 
f  was  determined  by  the  appropriation.  The  control  of  as- 
\  signment  formerly  exercised  by  the  ancient  Exchequer  was 
now  naturally  transferred  to  the  comptroller.  The  special 
assignment  orders  used  when  loans  were  raised,  ceased 
of  themselves  with  the  organization  of  the  public  debt.«* 
The  payments  were  made  by  the  Bank  on  checks  from 
the  pay  offices,  and  the  sums  paid  debited  to  the  accounts 
of  the  latter.  The  Bank  sent  a  daily  return  of  such  pay- 
ments to  the  comptroller  and  a  weekly  return  of  the 
receipts  and  payments  of  the  latter  to  the  Treasury. 

The  separate  accounts  at  the  Bank  and  the  powers 
of  the  public  offices  to  use  the  same  were  regulated  by  a 
treasiiry  minute  of  September  26,  1834.^  The  accounts 
of  such  public  offices  as  had  possessed  them  since  1806 
were  once  more  expressly  recognized  as  public  accounts; 
payments  into  these  had  to  be  made  daily  by  the  offices; 
their  own  expenses  of  management  might  be  met  partly 
by  the  retention  of  a  small  cash  balance,  partly  by  checks 
drawn  on  their  accounts;  transfers  from  the  exchequer 
account  were  made  three  times  a  week.  In  addition  to 
the  exchequer  account  and  to  the  already  existing  accounts 
of  the  paymaster-general  of  the  forces  and  of  the  exchequer 
bills,  four  fresh  credit  accounts  were  opened  as  a  pre- 
liminary measure,   with  the  following   "public  account- 

o  The  forms  for  royal  orders,  treasury  warrants,  and  exchequer  warrants 
were  determined  by  a  minute  of  Sept.  26,  1834.  (Printed  in  "Rep.  on 
Public  Money,"  1856,  Ap.  i,  p.  479.) 

&  This  minute  is  printed  in  the  "Report  on  Pubhc  Monies,"  1856,  Ap. 
I,  p.  471. 

19s 


National      Monetary       Commission 

ants":  the  paymaster  of  the  civil  services,  the  master  of 
th.e  mint,  the  commissioners  for  the  reduction  of  the 
national  debt,  and  the  governor  and  company  of  the  Bank 
of  England." 

The  internal  constitution  of  these  accounts  was  some- 
what different  from  that  hitherto  customary.  The  re- 
ceipts of  the  offices  possessing  accounts  and  the  pay- 
ments made  from  one  office  to  another  in  the  course  of 
administrative  business  were  distinguished  from  the 
transfers  made  from  the  Exchequer,  and  the  Bank  was 
instructed  to  open  a  cash  account  for  the  former  and  an 
exchequer  credit  account  for  the  latter  and  to  place  them 
at  the  disposal  of  the  offices.  Payments  could  be  made 
from  both,  but  the  rule  was  that  the  cash  account  must 
be  exhausted  before  the  credit  account  was  drawn  upon. 
This  separation  of  accounts  made  it  for  the  first  time 
possible  to  check  the  issues  of  money  from  the  central 
treasury,  which  was  represented  by  the  exchequer  account. 

The  ancient  central  treasury  was  entirely  abolished  by 
these  changes.  After  1834  it  was  no  longer  possible  to 
speak  of  a  central  public  treasury  unless  by  this  the  Bank 
was  meant.  There  was  nominally  no  official  of  the  old 
receipt  side  of  the  Exchequer  remaining.  Its  functions 
were,  however,  partly  exercised  by  the  comptroller-general, 
who,  indeed,  retained  the  name  of  the  original  central 
authority  for  administering  public  money  and  accoimts — 
the  Exchequer — although  he  was  only  "a  sort  of  shadow 
of  the  Ancient  Exchequer."  The  audit  office  had  long 
ago  been  separately  constituted,  and  now  the  Exchequer, 
as  an  office  for  managing  the  public  money,  disappeared. 

o-  "Report  on  Public  Monies,"  1856,  Ap.  i,  p.  476. 
196 


The     English     Banking     System 

It  continued  merely  as  a  bookkeeping  office  for  the  con- 
trol of  the  Treasury,  the  position  and  further  develop- 
ment of  which  are  connected  with  those  of  the  audit 
office  which  will  be  dealt  with  below." 

(j)  Reforms  in  organization  and  administration  between 
1834  and  1866. 

The  act  of  1834  gave  legal  recognition  to  the  principle 
that  all  public  money  should  be  intrusted  to  and  adminis- 
tered by  the  Bank  until  it  was  actually  expended.  This 
plan  had  already  been  adopted  in  practice,  so  that  there 
was  a  positive  advantage  in  the  resulting  abolition  of  the 
Exchequer.  The  consequences  which  might  have  followed 
from  a  complete  reorganization  of  the  system  of  making 
payments  were  not  entailed.  The  evils  of  earlier  times 
were  only  in  part  removed.  The  receivers  paid  in  their 
net  receipts  only.  The  issues  were  still  managed  as 
before  by  a  division  of  the  money  among  numerous  special 
offices,  each  of  which  was  authorized  and,  indeed,  obliged 
to  keep  a  large  balance  in  its  account  in  order  to  meet 
the  current  claims  for  payment.  The  receivers  were 
under  the  control  of  the  Treasury.  The  issue  offices  were 
supervised  by  their  respective  administrative  authorities. 
The  comptroller-general  controlled  only  the  net  public 
revenue  and  the  payments  made  from  this  in  lump  sums 
to  the  numerous  pay  offices,  which  sums  had  been  assigned 
to  the  different  services  by  parliamentary  vote. 

But  a  basis  was  now  secured  from  which  the  whole 
system  of  expenditure  might  be  simplified,  an  economical 
use  of  the  cash  balances  might  be  made,  and  a  single 

a  The  name  "Exchequer"  is  still  always  used  to  denote  a  nominal  con- 
centration of  the  puljlic  revenues.  The  expressions,  issues  from  the  Ex- 
chequer, loans  to,  and  payments  into  the  Exchequer,  are  still  always  used. 

197 


National      Monetary       Commission 

efifective  control  be  maintained.  Reforms  aiming  at 
these  results  were  in  fact  carried  out  zealously  during 
the  next  decades,  and  especially  by  parliamentary 
activity.  When  the  Bank  undertook  the  entire  adminis- 
tration of  the  public  money,  all  the  technical  advantages 
of  banking  were  placed  at  the  disposal  of  the  Government  ; 
hence  the  question  naturally  was  how  to  use  this  connec- 
tion with  reference  to  the  aims  specified  above.  For  this 
purpose  the  essential  requirement  was  to  centralize  the 
system  of  payments  as  far  as  possible,  so  as  to  give  to  the 
Treasury  and  audit  office  the  necessary  check  on  the 
position  of  the  finances.  This  task  was  accomplished 
by  various  acts  of  Parliament  and  orders,  which  form 
the  transition  to  the  present  system. 

The  consolidation  in  1836  of  the  pay  offices  of  the  pay- 
master of  the  forces  into  the  single  office  of  the  paymaster- 
general  was  the  first  step  toward  a  consolidation  of  the 
system  of  issues.  The  abolition  of  the  paymasters  of  the 
civil  services  and  of  the  exchequer  bills  in  1848  and  the 
transference  of  their  functions  to  the  paymaster-general 
completed  this  process.  All  issues  for  administrative 
purposes  were  concentrated  in  one  hand.  The  functions 
of  this  consolidated  pay  office  were  regulated  by  treasury 
minutes,  not  without  opposition  on  the  part  of  the  comp- 
troller-general." 

a  The  most  important  of  these  treasury  minutes  printed  in  the  "Report 
on  PubUc  Monies,"  1856,  Ap.  I,  p.  491  ct  seq.  are  those  of  Aug.  19,  1836,  and 
Nov.  19,  1836,  on  the  consoUdation  of  the  separate  pay  offices  of  the 
paymaster  of  the  forces,  and  of  Dec.  22,  1848,  by  which  the  abohtion  of 
the  remaining  special  offices  and  the  final  regulation  of  the  head  pay  office 
were  accomplished.  Lord  Monteagle,  the  comptroller  -  general,  raised 
objections  to  the  latter  minute  on  the  ground  that  it  concentrated  the 
public  monies  in  the  hands  of  the  paymaster-general  and  allowed  him 
to  apply  it  at  will  to  the  difTerent  public  services. 


The     E  n  g- 1  i  s  h     Banking-     System 

Whereas  hitherto  the  pubHc  money  had  been  trans- 
ferred from  the  exchequer  account  to  those  of  the  dif- 
ferent paymasters,  in  accordance  with  the  demands 
which  the  latter  made  to  the  comptroller-general  through 
the  Treasury,  now  only  the  account  of  the  paymaster- 
general  was  supplied  from  that  of  the  Exchequer.  The 
more  the  issue  accounts  were  divided  and  the  more 
completely  the  payments  from  the  Exchequer  were  sepa- 
rated, so  much  the  more  readily  could  the  comptroller 
follow  the  course  of  the  payments.  Thus  in  the  civil 
service  the  practice  had  hitherto  been  followed  of  open- 
ing an  account  at  the  Bank  for  every  separate  vote  of 
Parliament.  The  balance  standing  to  the  credit  of  one 
account  might  not  be  used  for  payments  which  had  to 
be  entered  under  a  different  vote.  Thus  a  check  was  at 
once  put  upon  any  misapplication  of  the  money.  When 
the  consolidated  pay  office  was  created,  however,  this 
useful  system  was  not  only  extended  no  further,  but  was 
completely  done  away  with.  The  gain  in  simplicity  and 
distinctness  seems  the  less  valuable  owing  to  the  loss  of 
any  method  of  checking  the  assignment  of  money,  that  is, 
so  far  as  a  strict  subsequent  control  does  not  render  the 
earlier  check  superfluous.  The  development  of  this 
branch  of  the  system  of  control  since  the  institution  of 
the  commissioners  of  audit  in  1785  must  be  briefly  de- 
scribed here  in  order  to  make  what  follows  more  com- 
prehensible. 

The  commissioners  of  audit  succeeded  to  all  the  official 
duties  of  the  auditors  of  imprest.  They  were  subjected 
by  law  "to  the  same  control  to  which  the  auditors  of  the 
imprest  were  then  subject  or  liable  by   law,   usage,   or 


199 


National      Monetary       Commission 

custom."  And  by  their  patent  they  were  empowered  "  to 
audit  and  determine  accounts  by  and  w4th  the  advice, 
authority,  and  consent  of  the  Lords  of  the  Treasury  and 
Chancellor  of  the  Exchequer."  Thus  they  were  entirely 
dependent  on  the  latter,  except  in  so  far  as  their  functions 
might  be  widened  by  law.  This  happened  as  early  as 
1799  when,  by  39  Geo.  Ill,  c.  83,  the  auditors  of  the 
land  revenue  were  discontinued,  and  their  powers  trans- 
ferred to  the  commissioners  of  audit.«  In  the  following 
year  their  powers  were  still  further  increased.  ^  but  this 
audit  had  always  one  great  defect ;  it  was  not  independent 
and  did  not  extend  over  the  whole  of  the  public  expendi- 
ture. 

2  Will.  IV,  c.  40  marked  the  beginning  of  changes  of  a 
different  type.  This  act  transferred  to  the  auditors  the 
detailed  audit  of  the  navy  accounts  on  such  terms  that 
they  not  only  checked  the  actual  payments  but  also  the 
correspondence  of  these  with  the  parliamentary  vote. 
This  was  the  appropriation  audit,  the  audit  whose  object 
it  was  to  ensure  that  the  money  was  spent  according  to 
the  appropriations  made  by  Parliament.  It  marks  the 
transition   from   a  system   of   administrative   to   one   of 

fl  In  consequence  of  reports  issued  by  select  committees  from  1792  on- 
ward, with  regard  to  the  position  of  the  finances  and  especially  to  the 
system  of  public  accounts.  See  in  particular  the  report  in  1797  on  audit- 
ing the  accounts  of  the  public  receipt  and  expenditure.  "Reports  of 
Committees  of  the  House  of  Commons,"  Vol.  XII,  Rep.  22.  [The  Reprints 
of  1803,  16  vols.,  fol.] 

^  By  39  and  40  Geo.  Ill,  c.  54,  they  were  empowered  to  recover  balances 
due  to  the  public  accountants  after  the  accounts  had  been  audited,  and  to 
charge  interest  in  case  of  delay.  45  Geo.  Ill,  c.  91  and  c.  141,  regulated  the 
technical  procedure  of  the  audit;  by  2  and  3  Will.  IV,  c.  26,  the  audit 
of  the  colonial  accounts,  and  by  2  and  3  Will.  IV,  c.  99,  the  audit  of  the 
Irish  accounts  were  entrusted  to  them. 


The     English     Banking     S  y  stem 

legislative  control.  The  latter,  however,  was  still  very 
limited.  The  auditors  had  no  connection  with  Parlia- 
ment and  could  not  express  their  opinion  publicly  about 
abuses,  but  only  through  a  memorandum  to  the  Treasury. « 

The  total  expenditure  was  of  course  subjected  to  that 
control  which,  since  the  abolition  of  the  public  treasury 
and  the  transference  of  its  functions  to  the  Bank  of 
England,  had  been  vested  in  the  comptroller-general. 
But  this  afforded  no  satisfactory  check  on  the  applica- 
tion of  the  money  voted  by  Parliament  and  thus  had  to 
be  extended  by  the  appropriation  audit  of  the  auditors. 
This  was  itself  unsatisfactory  in  its  existing  form.  The 
remaining  offices  on  the  account  side  proved  themselves 
more  and  more  superfluous  in  connection  with  the  growing 
functions  of  the  commissioners  of  audit.  The  accounts 
of  the  clerk  of  the  pipe  might  be  replaced  by  the  books 
kept  by  them  and  by  the  comptroller;  the  associated 
offices  might  be  simplified.  This  was  accomplished  by 
3  and  4  Will  IV,  c.  99,  which  abolished  all  head  and 
subordinate  offices  on  the  account  side  with  the  exception 
of  that  of  the  King's  remembrancer,  so-called,  which  was 
united  with  the  Court  of  the  Exchequer. 

During  the  following  years  all  attempts  at  reform 
were  directed  toward  extending  the  audit  and  making 
it  more  efficient,  while  at  the  same  time  improving  the 
system  of  accounts.  The  powers  of  the  auditors  were 
increased  by  10  Vict.,  c.  92,  which  act  introduced  the 
appropriation  audit  into  the  departments  of  the  War 
Office  and  Ordnance.     In  1849  they  were  empowered  to 

t* Report  of  the  Audit  Office  on  "The  Functions  of  the  Committee  of 
Audit,"  1851,  in  "Report  on  Public  Monies,"  P.  P.  1858,  375,  p.  836. 


National      M  on  et  ary       Commission 

present  a  yearly  return  to  Parliament  of  the  appropria- 
tion audit. "^  Bookkeeping  by  double  entry  was  gradu- 
ally introduced  ^  and  the  whole  system  of  accomit  keeping 
and  audit  was  subjected  to  a  detailed  inquiry/  Two 
tendencies  become  evident  from  this.  From  the  tech- 
nical standpoint  the  aim  was  to  simplify  both  the  offices 
and  their  functions  and  to  secure  a  proper  exercise  of 
the  latter;  but  from  the  legal  and  political  standpoint 
the  aim  was  to  strengthen  the  control  of  the  Treasury 
and  to  combine  this  with  the  right  of  ParUament  to 
control  the  application  of  the  public  money. 

English  parliamentary  history  contains  instances,  dat- 
ing back  to  the  earliest  times,  of  the  exercise  of  parlia- 
mentary control  over  expenditure.^  The  numerous  com- 
missions of  inquiry  and  interpellations  of  ministers  supply 
a  continual  series  of  assertions  of  this  right  during  the 
eighteenth    century.     But    no    fundamental    conception 

a  "Treasury  Minute,"  Apr.  13,  1849. 

b "Treasury  Minutes,"  Sept.  26,  1834,  Aug.  19,  1836,  May  9,  1837,  Aug. 
22,  1848;  "Report  on  Public  Monies,"  P.  P.,  1856,  375,  p.  476  et  seq. 

ein  addition  to  the  twenty-second  report  of  the  finance  committee  of 
1797  the  following  reports  for  the  earlier  period  should  be  noticed:  The 
fifth  report  of  the  committee  of  1810  (P.  P.,  371),  the  tenth  report  of 
the  committee  of  181 1  (P.  P.,  253),  the  fifth  report  of  the  committee 
of  1819  (P.  P.,  539),  the  evidence  before  the  committee  of  1821  (P.  P., 
284).  Further:  for  the  naval  and  military  accounts,  P.  P.,  1856  N.  160; 
for  the  whole  system  of  public  accounts  and  public  money  the  "Report 
on  Public  Monies,"  1856  N.  375  and  1857  N.  279,  and,  finally,  the  yearly 
reports  of  the  select  committees  on  public  accounts  since  1861. 

dThe  earliest  instance  was  in  14  Edw.  Ill  (1340).  William  de  la  Pole 
and  John  Chamels  were  summoned  to  appear  before  certain  persons 
specified  by  Parliament  and  present  accounts  of  their  receipts  and  expen- 
diture (Hatzell  "Precedents,"  vol.  3,  p.  72).  Richard  II  appointed  a 
commission  in  1380,  at  the  request  of  Parliament,  and  authorized  it  "exami- 
nandi  et  supervidendi  quascunque  summas  et  modum  expensarum  ac 
statum  hospitii  nostri"  (Rymer's  Foedera, "  Vol.  VII,  p.  250).  These 
instances  become  nmch  more  numerous  during  the  succeeding  years. 


The     English     Banking     S  y  stem 

of  a  control  extending  over  the  entire  management  of 
the  pubUc  money  was  attained  until  the  middle  of  the 
nineteenth  century,  just  as  it  was  only  in  this  century 
that  the  whole  administration  of  finance  began  to  be 
organized  on  one  definite  principle.  Parliament,  when 
it  has  secured  complete  power  over  the  public  revenue 
and  expenditure,  ought  also  to  control  the  administration 
of  this  money.  But  since  it  can  not  undertake  this 
itself,  the  controlling  authority  must  be  made  entirely 
independent  of  temporary  governments  and  put  into 
direct  connection  with  Parliament.« 

This  was  the  state  of  the  system  of  control  when, 
owing  to  the  consolidation  of  the  pay  offices  and  the 
problems  connected  therewith.  Parliament  had  the  oppor- 
tunity to  make  a  thorough  investigation.  In  1856  and 
1857  the  organization  of  the  receipts,  issues,  and  audit 
was  carefully  examined  by  the  committee  on  public 
monies.  The  chief  object  was  to  solve  the  problem 
connected  with  the  consolidation — i.  e.,  to  determine 
in  what  way  this  concentrated  pay  office  could  be  sub- 
jected to  an  effective  control.  Owing  to  its  history, 
the  Exchequer,   or   rather  the    comptroller-general  who 

«These  ideas  are  most  clearly  expressed  in  the  "Observations"  by  the 
comptroller-general,  prepared  at  the  request  of  the  select  committee  on 
public  monies  in  1857,  on  the  "Memorandum  on  Financial  Control," 
by  the  chancellor  of  the  exchequer  laid  before  the  committee  in  the  same 
year.  The  comptroller  states:  "I  deny  that  such  confidence  in  the  Execu- 
tive Government  is,  has  been,  or  ought  to  be  recognized  in  any  free  State. 
On  the  contrary,  it  is  constitutional  jealousy  and  not  confidence  ujion 
which  our  institutions  are  founded  and  on  which  the  safety  of  the  liberties 
of  England  depends.  *  *  *  The  Comptroller-General  of  the  Exchequer 
is  an  officer  of  the  Crown,  but  he  is  also,  most  wisely,  made  responsible  (4 
Will.  IV,  c.  16,  s.  2)  to  both  Houses  of  Parliament.  On  the  maintenance  of 
this  principle  the  very  existence  of  our  constitution  depends."  "Report 
on  Pubhc  Monies,"  P.  P.,   1857,  279,  pp.  67,  68. 


203 


National      Moneta?'y       Commission 

had  replaced  it,  already,  in  relation  to  the  assignment 
of  money,  checked  the  legality  of  the  payments  made 
in  consequence  of  this  assignment.  So  long  as  the  Ex- 
chequer was  still  the  public  treasury  this  check  was 
simple  and  natural.  But  after  the  transference  of  the 
public  money  to  the  Bank,  and  the  formation  of  the 
single  financial  office  of  the  paymaster-general,  the  power 
of  the  Exchequer  was  limited  to  the  opening  of  accounts 
at  the  Bank,  and  the  actual  payments  were  made  outside 
its  sphere  of  observation.  If  its  control  were  still  to 
extend  over  these  latter,  the  facility  -with  which  pay- 
ments could  be  made  must  be  thereby  lessened.  The 
most  important  opponent  of  control  through  the  Ex- 
chequer has  stated  these  contradictory  demands  in 
expressing  his  adverse  judgment:  "The  worst  part  of 
the  Exchequer  system  is  the  attempt  to  carry  out  a  scheme 
of  separate  Exchequer  Credits  upon  hundreds  of  heads 
of  service  through  the  daily  operations  of  cash,  instead 
of  confining  the  credits,  as  the  French  do,  to  the  annual 
votes  or ' '  Legislative  credits.  "  The  breaking  up  of  annual 
votes  into  daily  credits  with  a  specific  appropriation  of 
each  daily  credit,  which  must  not  be  extended,  would  be 
fatal  to  simplicity  and  regularity  of  payment  and  agcount, 
even  if  the  plan  could  be  carried  out  in  practice. "" 

In  answer  to  the  just  complaints  about  the  financial 
administration,  which  were  made  by  the  controlling 
authority,  viz,  that  it  disregarded  the  appropriation  made 
by  Parliament,  that  it  permitted  illegal  application  of 
money  and   even   allowed   payments   for   purposes   not 

o  W.  G.  Anderson,  principal  clerk  of  the  financial  business  of  the  Treasury, 
in  his  "Remarks"  on  Lord  Monteagle's  "Memorandum  on  the  Exchequer," 
1854,  "Report  on  Public  Monies,"  1856,  Ap.  i,  p.  560. 

204 


The     English     Banking     System 

sanctioned  by  law,<=^  the  main  argument  was  that  no  control 
ah  ante  could  prevent  such  abuses.  The  result  was  that 
the  positive  proposals  made  by  the  select  committees  of 
1856  and  1857^  were  to  leave  to  the  comptroller-general, 
as  before,  the  control  of  the  general  assignments,  but  in 
addition  to  appoint  officers  tmder  the  commissioners  of 
audit  for  each  department  of  the  public  service,  who 
should  check  the  daily  payments  of  the  department  and 
report  on  any  irregularities.  Moreover  the  accounts  of 
the  public  departments  were  to  undergo  an  additional 
examination  and  two  accounts  were  to  be  submitted  to 
Parliament:  the  finance  accounts,  which  were  merely 
an  unaudited  statement  of  the  receipts  and  issues  of  the 
Exchequer,  on  the  part  of  the  Treasury,  and  the  appro- 
priation accounts — i.  e.,  public  accounts  based  on  an 
examination  and  checking  of  the  actual  expenditure. 
These  proposals  were  carried  out  in  24  and  25  Vict.,  c.  93; 
28  and  29  Vict.,  c.  93,  and  29  and  30  Vict.,  c.  39,  and  form 
the  basis  of  the  present  system  of  accounts  and  audit. <= 
The  position  of  the  pay  offices  remains  undisturbed  thereby,*^ 
and  the  control  is  in  principle  satisfactory. 

o^Thus  in  the  year  1852-53  a  contract  was  concluded  by  the  Admiralty 
for  the  cession  of  the  patent  for  a  ship's  screw  for  £10,000.  This  sum  was 
paid  out  of  one  of  the  grants  for  the  civil  service.  It  was  not  included  in 
the  estimate  until  1853-54  when  the  money  was  refunded  out  of  this  vote. 

0  "Report  on  Public  Monies,"  P.  P.,  1857,  279,  p.  3  et  seq. 

cBy  54  Vict.,  c.  24,  the  Treasury  was  authorized  to  apply  charges  and 
fines  paid  into  the  Exchequer  to  services  for  which  notes  had  been  granted, 
subject,  however,  to  the  subsequent  approval  of  Parliament. 

d  "Report  on  Pubhc  Monies,"  P.  P.  1857,  279,  p.  3  et  seq.  "Your  com- 
mittee are  satisfied,  from  the  evidence  taken  before  them,  that  the  consoli- 
dation of  the  Pay  Departments  has  been  attended  with  public  benefit; 
that  it  has  diminished  the  balances  left  in  the  hands  of  the  public  account- 
ants to  the  crown;  that  it  has  increased  the  security  of  public  money  and 
promoted  economy." 


205 


National    Monetary     Commission 

Next  to  the  consolidation  of  the  pay  departments  the 
organization  of  the  payments  of  the  revenue  departments 
has  been  the  most  important  step  taken  since  1834  with 
regard  to  the  administration  of  public  money.  The  sys- 
tem which  had  prevailed  in  earlier  times  of  earmarking 
different  heads  of  revenue  for  specific  purposes  was 
adhered  to  for  many  payments  until  the  middle  of  the 
nineteenth  century.«  Hence  the  revenue  coming  into  the 
Exchequer  was  diminished  not  only  by  the  expenses  of 
collection  and  management  but  also  by  those  payments 
which,  owing  to  this  system,  were  not  checked  by  the 
comptroller- general  before  they  were  made.  The  com- 
missioners of  1 83 1  had  already  recommended  "that  the 
gross  receipts  of  public  money  from  any  sources  should 
be  placed  without  deduction  in  the  custody  of  the  Ex- 
chequer and  be  accounted  for  to  Parliament,  whose  au- 
thority should  be  necessary  for  the  appropriation  of  the 
whole."''  This  proposal  was,  however,  with  the  exception 
of  minor  provisions,*^  not  carried  out  until  1854.  when 
Gladstone  caused  an  act  to  be  passed  dealing  with  the 
matter.  By  17  and  18  Vict.,  c.  94,  all  payments  still 
charged  upon  certain  specified  branches  of  revenue  were 
transferred  to  the  consolidated  fund.  Although  it  was 
not  stated  in  the  act,  the  necessary  consequence  was  that 

a  A  list  of  the  payments  made  directly  through  the  revenue  departments 
is  given  in  Schedules  A  and  B  of  1 7  and  18  Vict.,  c.  94. 

ö  "Report  on  Exchequer,"  P.  P.,  1831,  113,  p.  4. 

c  By  a  treasur>'  minute  of  May  2,  1848,  the  custom  of  the  army  and  navy 
departments  of  deducting  from  their  yearly  claims  the  sum  received  from 
the  sale  of  old  stores  was  discontinued.  The  receipts  were  transferred  to 
the  Exchequer  and  the  expenses  stated  fully.  By  14  and  15  Vict.,  c.  42,  it 
was  enacted  that  the  costs  of  managing  public  property  should  be  provided 
by  Parliament. 


206 


The     English     Banking     S  y  stem 

now  the  gross  revenue  of  the  State  was  paid  into  the 
Exchequer,  through  which  all  payments  had  to  be  made. 
But  to  pay  in  actually  to  the  exchequer  account  at  the 
Bank,  the  revenues  raised  throughout  the  country,  and  to 
pay  them  out  again  to  the  coUectors  or  other  local  officials 
(agents,  commissioners)  to  meet  local  expenses,  would 
have  been  exceedingly  difficult  and  fatal  to  an  economical 
administration.  The  object  in  view  was  merely  to  place 
all  receipts  and  all  issues  under  a  central  control  and  under 
Parliament,  which  latter  must  secure  a  knowledge  of  the 
total  payments  from  the  public  accounts  which  were  based 
on  the  exchequer  accounts.  Only  in  bookkeeping  was  it 
necessary  that  all  the  receipts  should  be  paid  into  the 
Exchequer,  and  all  payments  be  made  from  it. 

It  was  with  this  aim  that  the  payments  of  the  revenue 
departments  were  regulated  by  the  treasury  minute  of 
August  22,  1854.'^  The  minute  distinguished  between  pay- 
ments and  advances.  The  former  are,  as  before,  deducted 
from  the  sum  to  be  paid  into  the  Exchequer;  the  latter 
are  partly  expenses  of  management,  partly  expenses  for 
other  public  departments,  which  have  to  be  returned  to  the 
revenue  departments,  and  are  paid  in  to  the  Exchequer  as 
part  of  the  receipts. 

The  "exchequer  and  audit  departments  act  1866" 
(29  and  30  Vict.,  c.  39)  ^  provided  a  definite  organization 
for  the  system  of  receipt,  issue,  and  audit.  Section  10 
provided  expressly  that  the  total  gross  revenue  shall  be 

a  "Report  on  Public  Monies,"  1856,  Ap.  2,  p.  578. 

b  The  act  is  entitled:  "  An  Act  to  consolidate  the  Duties  of  the  Excheq- 
uer and  Audit  Departments,  to  regulate  the  Receipt,  Custody,  and  Issue  of 
Public  Monies,  and  to  provide  for  the  Audit  of  the  Accounts  thereof." 
Supplemented  by  the  Public  Accounts  and  Charges  Act,  1891,  54  Vict., 
c.  24. 

207 


National     Monetary     Commission 

paid  into  the  exchequer  account,  a  rule  hitherto  only 
applied  indirectly  through  the  charging  of  all  expenditure 
to  the  consolidated  fund.  At  the  same  time  the  revenue 
departments  retain  their  right  to  advance  money,  for 
themselves  and  on  behalf  of  other  departments,  to  be 
repaid  subsequently.  As  regards  the  management  of  the 
issues  it  is  stated  as  a  principle  that  the  moneys  paid  into 
the  exchequer  account  are  to  form  one  fund  in  the  books 
of  the  Bank.  Without  prejudicing  the  control  exercised 
by  the  comptroller-general  in  reference  to  the  separate 
assigments,  the  Treasury  is  authorized  to  check  the 
issues  and  to  restrict  to  the  money  required  for  making 
current  payments  the  sums  transferred  to  the  paymaster- 
general  and  by  him  to  the  different  departments.  Thus 
the  rule,  which  had  been  followed  in  the  management  of  the 
public  money  since  the  beginning  of  the  centur)'  as  the 
chief  axiom  of  an  economical  system,  was  now  legally 
recognized. 

The  right  of  assignment  and  the  manner  of  using  it 
remained  unaltered.  The  act  itself  distinguished  between 
the  right  of  disposing  (i)  of  the  issues  for  supply  services 
(s.  14)  and  (2)  of  the  credits  for  the  supply  services 
(s.  15).  The  Treasury  obtained  a  right  to  the  former  on 
royal  order,  and  to  the  latter  on  the  authority  of  the 
ways  and  means  act.  The  procedure  was  that  already 
described. 

The  system  of  audit  was  fundamentally  altered,  the 
office  of  comptroller-general  being  united  to  that  of  the 
chairman  of  the  commissioners  for  auditing  the  public 
accounts.  The  office  thus  constituted,  that  of  the 
"comptroller  and  auditor-general,"  resembled  that  of  the 

208 


The     English     Banking     Syste 


m 


president  of  the  highest  court  of  audit  in  a  continental 
country.  He  and  his  deputy  held  their  offices  "during 
good  behavior,"  and  could  only  be  removed  by  the  Crown 
on  an  address  from  both  Houses  of  Parliament.  They 
might  hold  no  other  office  nor  be  members  of  either 
House  of  Parliament.  The  comptroller-general  organized 
the  internal  arrangements  of  his  department  and,  in  con- 
cert with  the  Treasury,  prescribed  the  accounts  and  books 
to  be  kept  in  each  department  of  the  public  service. 

The  centralized  bookkeeping  managed  by  the  comp- 
troller-general was  abolished.  But  all  the  departments 
paying  money  into  the  Bank  had  to  send  accounts  of 
these  payments  to  the  comptroller-general,  who  also 
received  a  daily  return  from  the  Bank  with  regard  to  the 
exchequer  account,  made  out  in  the  form  prescribed  by 
the  Treasury.  These  enabled  him  to  learn  the  position  of . 
the  total  finances  and  helped  to  form  the  basis  of  the  con- 
trol which  he  exercised. 

The  auditor-general  exercises  a  double  control: 

(a)  The  sums  voted  for  the  annual  supply  services  are 
placed  at  the  disposal  of  the  Treasury  by  the  Bank  upon 
his  authority  alone;  and  only  by  his  instructions  may 
the  Bank  advance  money  to  meet  a  deficit. 

(Ö)  He  also  exercises  the  controlling  functions  which 
belonged  to  the  auditor,  and  in  an  extended  form.  He 
audits  all  the  accounts  of  the  public  expenditure  "on 
behalf  of  the  House  of  Commons"  (s.  27).  He  audits 
the  accounts  of  the  receivers  only  so  far  as  the  Treasury 
assigns  him  this  duty.  He  has  access  to  all  documents 
relating  to  the  accounts.  He  examines  firstly  whether 
the  assignment  was  correct;  secondly,  whether  the  pay- 


68299° — II 14  209 


National    Monetary     Commission 

ment  thus  assigned  has  been  made,  and,  thirdly,  whether 
it  was  in  accordance  with  the  appropriation.  The  ac- 
counts of  the  civil  service  are  audited  each  year  in  detail. 
Those  of  the  army  are  too  complicated,  and  hence  only  a 
test  audit  is  made  by  which  in  each  year  about  one-sixth 
of  the  total  expenditure  is  checked  in  detail.«  Every  year 
he  prepares  an  appropriation  account  over  the  actual  pub- 
lic expenditure,  compares  it  with  the  sums  voted,  and  lays 
it,  together  with  his  own  comments,  before  Parliament. 

II.    THE    BANK    AND    THE    ORGANIZATION    OF    THE    PUBLIC 

DEBT. 

The  administration  of  the  English  public  debt  during 
the  eighteenth  century  acquired  its  distinctive  character 
from  a  variety  of  causes.  The  creation  of  the  com- 
panies through  the  incorporation  of  debt;  the  varying 
share  taken  by  them  in  its  administration;  the  creation 
of  a  special  form  of  debt  through  the  exchequer  bills  and 
the  various  forms  of  ay  loannnuits;  and  the  growth  of 
the  public  debt  itself,  all  contributed  to  this.  During  the 
nineteenth  century,  on  the  other  hand,  no  new  feature 
was  added  to  the  character  already  formed.  Two  points 
should  be  noticed  with  respect  to  the  growth  of  the 
English  public  debt  during  this  century — on  the  tech- 
nical side  the  ever-increasing  connection  witli  the  Bank 
of  England;  and,  as  regards  the  actual  administration, 
the  endeavor  to  take  in  hand  seriously  the  problem  of 
redemption.     The  eighteenth  century  witnessed  the  for- 

o "  Minutes  of  Evidence  Taken  before  the  Committee  Appointed  to 
Inquire  into  the  System  of  MiUtar>'  Account  and  Estimate  in  India," 
1880.  Evidence  of  R.  E.  Wclby,  assistant  financial  secretary  of  the  treas- 
ury, on  the  procedure  in  England. 


The     English     Banking     System 

mation  of  the  enormous  English  debt;  the  nineteenth 
century  marked  the  beginning  of  its  systematic  repay- 
ment. There  were  no  fresh  issues  imtil  at  the  beginning 
of  the  2oth  century — due  to  the  South  African  War  and 
the  China  Expedition. 

The  history  of  the  administration  of  the  English  public 
debt  so  far  as  the  peculiar  character  of  its  technical 
organization  is  concerned,  really  ends  with  the  eighteenth 
century.  The  further  developments  are  only  the  results 
of  the  principle  estabHshed  in  the  course  of  this  hundred 
years.  They  are  merely  applications  of  one  fundamental 
idea  to  new  cases.  Hence  our  account  may  here  be  brief, 
and  the  more  so  since  the  most  important  part  of  the 
history  of  the  English  debt  during  the  nineteenth  century, 
viz,  the  account  of  its  redemption,  falls  outside  of  the 
scope  of  a  work  which  is  concerned  only  with  the  admin- 
istration of  the  debt  through  the  Bank.* 

In  consequence  of  the  French  war  the  English  Govern- 
ment was  continually  forced  to  raise  loans;  both  funded 
and  unfunded  debt  increased  to  an  enormous  extent  from 
1790  onward  into  the  first  decade  of  the  nineteenth  cen- 
tury. It  was  obvious  that  it  was  impossible  under  the 
circumstances  to  think  seriously  of  breaking  the  connec- 
tion with  the  Bank  of  England  and  handing  over  the  man- 
agement of  the  public  debt  to,  say,  the  South  Sea  Company, 
as  was  proposed  in  1797.  The  Bank  was  indeed  the  most 
effective  support  of  public  credit  at  this  time,  being  always 

0  For  an  account  of  the  redemption  see  Leroy-Beaulieu,  "Traitd  de  la 
science  des  finances,"  Vol.  II,  Bk.  II,  ch.  ix.  This  account,  however, 
is  incomplete  in  regard  to  the  history  of  the  different  sinking  funds.  (See 
also  Report  by  the  Secretary  and  Comptroller-General  of  the  Proceedings  of 
the  Commissioners  for  the  Reduction  of  the  National  Debt,  from  1786  to 
Mar.  31,  1890,  1 89 1,  C.  6539.) 


National     Monetary     Commission 

able  to  supply  the  needs  of  the  Government  either  from 
its  own  resources,  or  by  acting  as  an  intermediary  for  others. 
The  South  Sea  Company  decreased  in  importance  and 
subsisted  on  the  remnants  merely  of  its  early  significance. 
Its  administration  of  the  £20,000,000  of  debt  intrusted 
to  it  continued  into  the  nineteenth  century.  No  further 
sums  were  borrowed  from  it.  The  debt  still  owing  to  it 
was  diminished  by  frequent  repayments,  so  that  by  1853 
it  was  reduced  to  £9,000,000.  Finally  in  this  year  Glad- 
stone brought  forward  a  project  to  pay  off  this  debt  alto- 
gether, or  rather  to  transform  it  into  an  annuity -bearing 
debt  under  the  management  of  the  Bank.  More  than 
£7,000,000  was  paid  back  in  cash  to  creditors  who  would 
not  agree  to  the  project,  the  rest  was  converted,  partly 
into  2] 2  per  cent  annuities,  partly  into  a  debt  created  by 
the  same  act  (16  Vict.,  c.  23) — the  exchequer  bonds. 
Neither  was  redeemable  by  the  State  until  1894.  The  3 
per  cent  consols  were  converted  into  234"  per  cents  from 
April  5,  1889,  by  Mr.  Goschen,  and  into  2%  per  cents  from 
April  5,  1903.  Three  large  issues  of  consols  were  made  at 
the  beginning  of  the  twentieth  century,  owing  to  the  Boer 
war  and  the  China  expedition.  Since  the  end  of  the 
eighteenth  century  the  Bank  had  continually  acted  as 
intermediary  in  raising  loans  for  the  Government,  and  the 
total  public  debt  administered  by  it  amounted  to  nearly 
£800,000,000  at  the  conclusion  of  the  French  war.  Thus 
all  external  motives  for  depriving  it  of  this  function  had 
now  completely  disappeared  and  it  has  since  continued 
undisputed   administrator  of   the  public  debt. 

Since  1750  the  government  debt  to  the  Bank  had,  \\ith 
the  exception  of  a  temporary  loan  (1816)  which  was  soon 


The     English     Banking     System 

repaid,  only  undergone  one  alteration:  In  1834,  £671,700 
had  been  paid  back,  so  that  it  now  amounted  to  £11,015,- 
100.«  The  interest  was  paid  out  of  the  permanent  annual 
charge  for  the  National  debt.^  The  government  debt  to 
other  creditors,  administered  by  the  Bank,  was  reorganized 
many  times,  but  the  same  work  was  required  from  the 
Bank  after  these  changes  as  before;  it  raised  fresh  loans, 
opened  books  for  the  public  creditors,  paid  the  interest, 
redeemed  the  capital,  arranged  for  the  exchange  of  bonds 
when  there  was  a  conversion,  etc.  These  duties  were 
much  simplified  when  the  public  treasury  was  united 
with  the  Bank.  The  earlier  assignments  from  the  Ex- 
chequer to  the  Bank  and  from  the  Bank  to  the  Exchequer 
became  simple  transfers  from  one  account  to  another. 
The  transference  to  the  Bank  of  the  management  of  the 
public  money  had  besides  much  influence  in  increasing 
the  Bank's  share  in  the  administration  of  the  debt.  No 
further  demand  was  made  for  any  alteration  in  this  already 
existing  connection.  The  intrusting  of  an  important 
part  of  the  management  of  public  expenditure  to  private 
corporations  must  have  been  regarded  in  earlier  times  as 
a  peculiarity  in  financial  administration,  but  this  man- 
agement naturally  formed  part  of  the  duties  taken  over 
by  the  Bank  when  the  latter  assumed  entire  administra- 
tion of  the  public  money  and  of  the  payments  connected 
therewith.  Thus  the  Bank  secured  a  monopoly  of  the 
administration  of  the  funded  debt.  This  connection, 
according  to  English  custom,  has  never  been  stated  as  a 

a  [In  1816  the  Bank  advanced  a  further  £3,000,000  at  3  per  cent,  making 
the  total  debt  £14,686,800.  In  1834  one-quarter  was  paid  off,  i.  e., 
£31671,700,  leaving  the  debt  as  now  £11,015,100.  Cf.  the  Report  of  1891, 
p.  93--H.  S.  F.] 

650  Vict.,  c.  16. 

213 


National    Monetary     Commission 

principle,  but  has  frequently  been  confirmed  in  individual 
cases.  Hence  the  administration  of  the  public  debt  has 
become  so  closely  bound  up  with  the  Bank  by  the  nature 
of  the  system  of  public  finance  and  by  tradition,  that  the 
connection  may  be  regarded  as  permanent. 

No  change  has  been  made  during  the  nineteenth  cen- 
tury in  the  methods  of  borrowing  or  in  the  administration 
of  the  funded  debt.  The  steady  redemption  of  the  latter 
is  the  only  feature  of  importance  to  notice.  But  through 
alterations  in  the  organization  of  the  unfunded  debt  the 
sphere  of  the  Bank's  influence  has  been  extended  in  this 
direction  also. 

The  unfunded  debts  of  the  eighteenth  century  were  of 
two  kinds :  the  bills  and  debentures  of  the  various  depart- 
ments of  the  public  ser\'ice,  forming  special  debts  of  each 
department  respectively,  and  the  exchequer  bills  and  loan 
debentures  issued  by  the  Treasury  and  representing  the 
debts  of  the  Government.  We  have  already  pointed  out 
that,  owing  to  the  development  of  an  organized  system 
which  involved  the  appropriation  of  separate  sums  for  the 
separate  departments  of  the  public  service,  the  former  had 
become  simple  book  debts  of  the  department  issuing  them , 
and  merely  entitled  the  creditors  to  receive  a  payment 
warrant.  As  the  whole  administration  of  the  public 
money  took  on  the  form  proper  to  payments  made  by 
private  individuals,  the  public  money  was  intrusted  to  the 
Bank,  and  the  payments  were  made  by  the  Bank  on  orders 
from  the  public  authorities.  Consequently  the  bills  and 
debentures  issued  by  the  latter  also  lost  their  original  charac- 
ter and  became  bills  of  exchange  through  which  the  admin- 
istrative authorities  of  the  time,  whenever  it  seemed  to 


214 


The     English     Banking     System 

them  impossible  to  pay  cash,  referred  the  person  making 
the  claim  either  to  the  Treasury,  the  pay  master- general 
or  the  Admiralty.  The  bill  was  then  accepted  and  handed 
over  to  the  Bank  to  be  cashed.« 

The  loan  debentures,  which  were  issued  by  the  Treasury, 
never  amounted,  in  1813,  to  as  much  as  a  million  at  any 
time  and,  when  these  were  repaid  in  18 16,  disappeared 
entirely  from  the  history  of  the  English  debt.^  But  the 
raising  of  money  by  exchequer  bills  continued  to  be  the 
method  usually  adopted  by  the  Government  and  of  which, 
often,  excessive  use  was  made. 

The  methods  of  issuing,  of  cashing,  and  of  paying 
interest  on  the  exchequer  bills  and  the  claims  arising  out 
of  them,  were  determined  by  48  George  III,  c.  i,  (1808)  — 
that  is,  the  provisions  which  had  hitherto  been  repeated 
in  each  act  of  Parliament  which  authorized  the  issue  of 
exchequer  bills  were  now  permanently  embodied  in  one 
special  act.  '^  But  this  act  placed  the  Bank  in  no  specially 
favored  position.  It  was  still  left  to  the  Treasury,  as  in 
the  case  of  the  first  Exchequer  Bills  act,  "to  enter  into 
any  contract  or  contracts  for  obliging  any  Person  or 
Persons,  Body  or  Bodies  Politick  or  Corporate,  to  circu- 
late and  exchange  at  some  Publick  Office  in  London  or 
Westminster  for  ready  Mone}^  all  such  Bills  as  shall  be 
demanded,  *  *  *  "  for  which  service  an  indemnity  was 
to  be  paid.     But  immediately  afterwards,  with  a  clear 

<^See  below  p.  248.  Fairman,  loc.cit.,  p.  155,  speaks  of  the  navy  bills  as 
early  as  1794  as  "being  negotiated  as  bills  of  exchange." 

h  Fairman,  loc.  cit.,  p.  147.  "Ret.  Nat.  Debt,"  p.  42  et  seq.,  "Ret.,  Publ. 
Inc.  and  Exp.,"  II,  p.  547. 

c  An  act  for  regulating  the  issuing  and  paying  off  of  exchequer  bills 
"  Whereas  it  is  expedient  that  permanent  Regulations  should  be  estab- 
lished in  relation  to  the  making  out"  etc. 


215 


National     Monetary     Commission 

reference  to  the  custom  hitherto  followed  of  making  these 
contracts  with  the  Bank,  it  was  stated  that  the  governor 
or  directors  of  the  Bank  of  England  should  not  be  debarred 
from  sitting  in  Parliament  if  they  made  such  a  contract 
with  the  Government  "on  Behalf  of  or  for  the  Benefit  of 
the  Governor  and  Company  of  the  Bank  of  England." 
As  before,  the  exchequer  bills  must  be  received  in  pay- 
ment of  taxes  and  bore  interest  reckoned  at  so  much 
per  cent  per  diem. 

A  new  form  of  floating  debt  came  into  existence,  side 
by  side  with  the  exchequer  bills,  at  the  end  of  the  eight- 
eenth century,  viz.,  treasury  bills  of  exchange,  issued  by 
the  Treasury.  The  opposite  thing  happened  here  to  what 
was  the  case  with  the  navy  bills,  ordnance  debentures, 
etc.  The  latter  became  mere  book  debts  when  the  man- 
agement of  the  public  money  was  so  organized  that  the 
total  issues  of  the  public  departments  concerned  were 
completely  covered  by  the  total  revenue  assigned  to  them. 
The  government  bills,  on  the  contrary,  so  long  as  they 
were  only  used  to  meet  expenses  covered  by  the  receipts, 
were  regarded  merely  as  a  special  form  of  payment,  but 
they  became  unfunded  debt  in  cases  where  they  were  not 
covered  by  the  ordinary  receipts.  E\'en  in  the  last  decade 
it  had  become  an  established  custom  of  the  Government 
in  case  of  need,  to  draw  bills  of  exchange  on  the  Bank  of 
England,  which  were  honored  by  the  latter  to  the  amount 
of  £20,000  or  £30,000.  This  accepted  maximum  for  the 
current  bank  loan  rose  to  £50,000.  in  1793.  It  is  well 
known  how  these  advances  to  the  Government,  which 
increased  in  December,  1795,  in  connection  with  the  loan 
on   security   of  exchequer   bills,    to   nearly    £13,000,000, 

216 


The     English     Banking     System 

prepared  the  way  for  the  crisis  of  1797  and  the  consequent 
restriction  of  cash  payments.  Definite  regulations  con- 
cerning the  credit  to  be  obtained  by  the  Government  from 
the  Bank  were  not,  however,  issued  until  181 7  and  18 19. 
The  provisions  contained  in  the  act  of  181 7  ^^•e  have 
already  noticed  in  another  place;  they  led  up  to  the  pro- 
vision of  a  satisfactory  cover  for  the  cash  deficit.  By 
59  George  III,  c.  76,  the  Bank  was  forbidden,  except  in 
case  of  a  mere  book  deficit,  to  advance  any  sum  to  the 
Government  on  the  security  of  exchequer  bills,  treasury 
bills,  or  other  similar  security,  without  the  express  consent 
of  Parliament.  In  case  of  need  the  first  lord  of  the  treas- 
ury or  the  chancellor  of  the  exchequer  must  present  a 
written  request  to  the  Bank,  and  a  copy  of  this  as  well  as 
of  the  answer  of  the  Bank  must  be  laid  before  Parliament. 
In  addition  it  was  provided  that  statements  of  all  advances 
made,  and  of  all  the  exchequer  or  treasury  bills  purchased, 
must  be  presented  to  the  House  of  Commons.  From  this 
time  onward  the  government  bills  of  exchange — i.  e.,  the 
treasury  bills — represent  unfunded  debt,  which  must  be 
voted  by  Parliament,  and  which  is  used,  like  the  exchequer 
bills,  as  an  exceptional  source  of  revenue.  The  latter,  in 
so  far  as  they  served  this  object,  and  to  distinguish  them 
from  the  deficiency  and  ways  and  means  bills,  were  called 
"  supply  bills,"  since  they  were  used  to  cover  the  expendi- 
ture voted  annually,  the  supplies. 

A  new  form  of  loan,  which  must  be  regarded  sometimes 
as  funded  and  sometimes  as  unfunded  debt,  was  created 
in  1853,  when  the  South  Sea  Company  was  dissolved  and 
a  portion  of  the  debt  to  it  was  converted  into  negotiable 
bonds.     These,  called  "exchequer  bonds,"  could  be  re- 


217 


National    Monetary     Commission 

deemed  by  the  Government,  bore  interest  at  3^  per  cent 
until  1864,  and  afterwards  at  2>2  per  cent,  and  ran  until 
1894.  In  the  National  Debt  and  Loan  Act  (50  Vict.,  c.  16) 
arrangements  were  made  for  the  interest,  by  way  of  ex- 
ception, to  be  included  in  the  permanent  annual  charge 
for  the  national  debt;  the  irredeemable  capital  of  these 
bonds  was  thus  included  in  the  funded  debt.  Since  then 
there  have  been  repeated  issues  of  similar  bonds  running 
for  short  periods  previously  determined,  and  which  must 
be  counted  as  floating  debt  on  account  of  their  short 
duration.  Thus,  since  1853  there  have  been  three  forms 
of  unfunded  debt — treasury  bills,  exchequer  bills,  and 
exchequer  bonds.  The  nature  of  these  bills  has  been  de- 
termined in  modern  times  by  three  acts  of  Parliament — 
29  Vict.,  c.  25  (1866),  40  Vict.,  c.  2  (1877),  and  4  Ed. 
VII,  c.  21  (1904).  In  1866  the  exchequer  bills  and  bonds 
were  regulated;  in  1877  the  treasury  bills;  in  1904  spe- 
cial regulations  were  made  for  the  exchequer  bonds.  The 
following  are  the  essential  provisions  of  the  acts :  " 

The  treasury  bills  resemble  bills  of  exchange;  they  are 
either  payable  to  order  or  to  bearer,  they  are  made  out 
for  a  definite  sum,  and  must  be  cashed  within  t\velve 
or,  at  the  outside,  fifteen^  months  of  the  day  of  issue. 
They  bear  no  fixed  interest  but  are  subject  to  such  dis- 
count as  may  be  agreed  upon  between  the  person  receiving 
them  and  the  Government,  when  they  are  issued. 

The  exchequer  bills  entitle  the  holder,  or,  if  they  are 
made  out  in  some  one's  name,  the  person  in  whose  favor 

a  The  forms  in  \vhich  these  bills  are  issued  are  given  in  a  treasury'  minute 
of  Mar.  16,  1877,  for  the  treasury  bills,  and  a  treasury  minute  of  Mar.  9, 
1867,  for  the  exchequer  bills  and  bonds.     See  Appendix  III. 

&  Three  months  after  the  end  of  the  financial  year.     (7  Ed.  VII,  c.  jo.) 


218 


The     English     Banking     System 

they  are  issued  or  his  order,  to  the  payment  of  the  sum  of 
money  stated  in  the  bill  together  with  all  outstanding 
interest,  at  any  date  after  twelve  months  and  within  five 
years  from  the  day  of  issue.  The  interest  is  not  stated  on 
the  bill,  but  is  announced  by  the  Treasury  in  the  London 
Gazette  every  quarter,  for  the  succeeding  quarter.  It  never 
exceeds  ^j4  per  cent  on  the  nominal  capital.  These  bills 
have  a  special  value  in  that  they  may  be  used  for  the  pay- 
ment of  taxes  in  the  second  half  of  any  year  commencing 
from  the  day  of  issue.«^ 

The  exchequer  bonds  are  payable  to  bearer  and  are 
issued  for  a  round  sum,  which  must  be  repaid  within  six 
years  of  the  date  of  issue.^  The  interest  is  paid  on  pres- 
entation of  the  coupons  attached  to  the  bonds.  <= 

The  same  acts  transferred  the  preparation  and  issue  of 
these  bills,  which  had  hitherto  been  managed  by  the 
Exchequer  or,  after  its  abolition,  by  the  comptroller- 
general,  to  the  Bank.  This  arrangement  had  been  pro- 
posed as  earl}'-  as  1857  by  the  then  chancellor  of  the 
exchequer,  '^  but  was  not  immediately  carried  out.  The 
transference  of  these  duties  to  the  Bank  in  1866  and  1877 

«The  limitation  in  the  use  of  exchequer  bills  for  the  payment  of  taxes 
dates  from  i  Vict.,  c.  26,  1838,  which  provides  that  they  may  not  be  so  used 
until  a  year  after  their  issue. 

&  57  Vict.,  c.  27,  orders  that:  Where  an  act  authorizes  any  sum  to  be 
issued  out  of  the  consolidated  fund  of  the  United  Kingdom  towards  making 
good  the  supply  granted  to  His  Majesty  for  the  service  of  any  year,  every 
sum  issued  in  pursuance  of  that  act  shall  be  applied  towards  making  good 
the  supply  so  granted  at  the  time  of  such  issue. 

c  On  two  occasions,  after  the  South  Sea  Company  was  dissolved,  ex- 
chequer bonds  of  longer  date  were  issued,  by  39  Vict.,  c.  i,  for  the  pur- 
chase of  the  Suez  Canal  shares,  which  bonds  run  till  191 2,  and  by  the  naval 
works  act,  5  Ed.  VII,  c.  20,  by  which  annuities  running  till  1925  might 
legally  run  for  a  period  of  thirty  years  from  the  date  of  borrowing. 

«^"Report  on  Public  Monies,"  1S57,  279,  Ap.  i.  p.  43. 


219 


National    Monetary     Commission 

completes  the  list  of  public  functions  which  it  can  per- 
form. It  now  undertakes  the  entire  business  of  a  central 
public  treasury  and  administers  the  funded  and  unfunded 
debt,  and  there  remains  no  branch  of  public  financial 
administration  in  which  it  is  not  the  center  or  starting 
point  of  all  activities. 

PART   IV. 

THE   PRESENT   POSITION    OF  THE   BANK  AS  THE  FINANCIAL 
SERVANT  OF  THE  STATE. 

We  have  attempted  in  what  precedes  to  show  how  the 
principle  of  an  administration  of  public  money  by  the 
Bank  has  been  evolved.  In  what  follows  we  shall  describe 
how  this  principle  works  in  practice  at  the  present  day, 
how  the  important  departments  cooperate  under  its  guid- 
ance, and  how  transfers  of  money,  assignments,  and  issues 
are  carried  on.  We  shall,  however,  only  consider  this 
process  in  so  far  as  the  Bank  of  England  forms  its  center. 
The  almost  complete  centralization  of  all  public  payments 
in  London,  and  the  direct  hold  of  the  Bank  on  the  process  of 
payment,  lend  an  importance  to  the  central  organization 
of  public  financial  administration  in  England  such  as  it 
possesses  in  no  other  country.  One  characteristic  of  the 
English  financial  administration,  which  is  only  explicable 
by  the  peculiar  nature  of  the  administrative  organization, 
and  is  only  possible  owing  to  the  part  played  by  the  Bank, 
is  that  the  public  revenues,  without  being  collected  in 
provincial  treasuries,  are  transmitted  direct  by  the  receiv- 
ers to  London  after  local  expenses  have  been  met.  The 
Bank  of  England  thus  actually  receives  the  surplus  cash 
of  all  the  revenue  departments.      And  it  is  a  peculiarity  of 


The     English     Banking     System 

the  method  of  pubhc  payments  that  the  greater  part  of 
the  budget  is  paid  in  London  itself,  and  that  for  expenses 
which  have  to  be  met  outside  London,  and  which  can  not 
be  paid  by  the  receivers,  the  money  is  ahvays  remitted 
from  London.  This  appears  to  be  a  disadvantage,  but 
through  the  intervention  of  the  Bank  it  becomes  perfectly 
simple.  In  any  case  the  result  is  that  the  most  important 
part  of  the  management  of  the  money  is  in  the  hands  of  the 
central  authorities. 

The  Treasury,  the  center  of  the  whole  financial  system, 
naturally  stands  at  the  head  of  the  administration  of  the 
public  money.  Its  function  and  especial  duty  is  to  insure 
the  accurate  balancing  of  the  financial  system — i.  e.,  to 
secure  a  constant  correspondence  between  the  receipts  and 
issues.  Like  the  head  of  a  large  business  firm  it  must 
continually  balance  the  current  receipts  against  the  liabili- 
ties of  the  State,  and  must  take  care  that  the  former  are 
ready  in  hand  to  meet  the  latter.  Hence  it  keeps  in  touch 
with  the  position  of  the  public  assets  at  the  Bank  and  with 
the  claims  which  present  themselves,  and  disposes  accord- 
ingly of  the  balance  at  the  Bank.  The  comptroller  and 
auditor-general  cooperates  with  it,  acting  as  a  constant 
check.  To  carry  out  the  Government's  obligations  in 
detail  is  the  duty  of  the  public  offices.  But  these  have  no 
direct  connection  with  the  Bank,  on  the  contrary  the  pay- 
master-general stands  between  them  and  the  Bank,  and 
satisfies  the  demands  of  all  public  offices  by  drafts  which 
the  Bank  honors.  The  Treasury,  the  auditor-general,  the 
paymaster-general,  and  the  Bank  are  thus  the  authorities 
through  whose  cooperation  public  payments  in  and  from 
London  are  managed.     I  do  not  propose  in  what  follows 


f 


National     Monetary     Commission 

to  distinguish  the  various  powers  and  functions  of  these 
authorities.  I  shall  only  give  an  account  of  the  process 
by  which  the  public  revenues  are  daily  concentrated  in 
the  Bank  of  England  and  thence  distributed  amongs-t  the 
public  services,  and  shall  describe  the  simple  machinery 
which  is  thus  set  in  motion. 

I.  THE  BANK  AS  MANAGER  OF  THE  PUBLIC  MONEY.« 

(j)    The  concentration  of  the  public  revenues  in  the  Bank. 

Each  of  the  head  offices  concerned  with  the  adminis- 
tration of  the  various  branches  of  the  revenue  (customs, 
inland  revenue,  post,  and  Cro^\^l  lands  offices)  has  an 
account  at  the  Bank.  All  the  money  received  by  these 
offices  is  in  the  first  instance  credited  to  one  of  these 
accounts.  Only  miscellaneous  receipts,  which  are  man- 
aged by  the  Treasury,  are  paid  direct  to  the  exchequer 
account.  ^ 

The  procedure  is  simple  so  long  as  both  receipts  and 
expenditures  take  place  in  London.  Payment  is  made 
either  to  the  receivers  general  and  other  receivers  of  taxes 
or  direct  to  the  Bank.  In  the  latter  case  the  Bank  must 
receive  a  written  authorization  from  the  office. '^ 

The  revenue  received  by  the  collectors  '^  in  the  provinces 
is  remitted  to  London  by  means  of  bills  of  exchange, 

«The  following  account,  except  where  special  authorities  are  referred  to, 
is  based  on  R.  Welby's  "Memorandum,"  of  Feb.  3,  1882,  to  the  Swedish 
Government,  and  on  information  received  on  the  spot. 

&  With  one  exception;  the  receiver  of  the  hereditary  revenue,  which 
belongs  to  the  miscellaneous  receipts,  has  a  separate  account. 

c  Minute  of  Sept.  25,  1855  ("Report  on  Public  Monies,"  1856,  p.  587). 

d  The  collectors  are  appointed  by  the  Commissioners  of  Inland  Revenue, 
established  by  53  Vict.,  c.  21.  The  ofllce  of  Receiver  General  of  Inland 
Revenue,  instituted  after  the  French  model  by  the  same  act,  was  abolished 
again  in  the  next  year  by  54  Vict.,  c.  24. 


The     English     Banking     System 

which  are  made  out  to  the  head  office  to  which  payment 
is  to  be  made.  Should  there  be  a  branch  of  the  Bank  of 
England  in  the  neighborhood  of  the  collector,  he  deposits 
his  money  there,  and  the  amount  is  at  once  credited  to  the 
general  account  of  the  Commissioners  of  Inland  Revenue 
in  the  books  of  the  Bank.  (54  Vict.,  c.  24.)  But  as 
the  Bank  of  England  has  only  nine  branches'^  remit- 
tances are  more  usual.  The  bills  run  for  two  or  three 
days  and  are  sent  to  the  Bank  by  the  Commissioners  of 
Inland  Revenue  to  be  cashed.  When  they  have  been 
honored  the  Bank  credits  the  accoimt  of  the  office  with 
the  amount  in  question. 

The  Commissioners  daily  ^  transfer  the  money  in  hand, 
with  the  exception  of  the  balance  required  for  the  next 
day,  to  the  general  account  of  the  Commissioners  of  Inland 
Revenue,  from  which  it  is  transferred  to  the  Exchequer 
account.  For  this  and  for  the  transfers  made  by  private 
persons  under  the  instructions  of  the  receivers — i.  e.,  for 
payments  into  the  Exchequer  account — special  authority 
from  the  comptroller-general  is  no  longer  necessary. 
They  are  made  on  written  assignments  from  the  office 
concerned." 

Certain  payments  are,  however,  made  both  by  the 
head  offices  and  by  the  collectors  before  the  money  is 
transferred  to  the  Bank.  These  payments  were  limited 
by  29  and  30  Vict.,  c.  39,  s.  10,  to  drawbacks,  repay- 
ments, and  discounts.     No  other  expenditure,  expenses  of 

« Manchester,  Liverpool,  Birmingham,  Bristol,  Leeds,  Plymouth,  New- 
castle on  Tyne,  Hull,  and  Portsmouth  (Whitaker's  "Almanack,"  1883,  p. 
232). 

^Minute  of  Mar.  2,  1855  ("Report  on  Public  Monies,"  p.  583). 

c Minute  of  Sept.  25,  1855,  "Report  on  Public  Monies,"  p.  587.  Gneist 
has  overlooked  this,  cf.  loc.  cit.,  Bk.  H,  p.  847. 

223 


National    Monetary     Commission 

management,  or  payments  on  behalf  of  other  depart- 
ments, may  be  permanently  charged  on  the  revenue  re- 
ceipts. Hence  the  procedure  is  as  follows:  The  expenses 
of  management,  which  are  voted  by  Parliament,  are  paid 
out  of  the  current  receipts  in  accordance  with  this  vote. 
From  time  to  time,  however,  the  head  office  applies  to  the 
Treasury  and  has  the  sum  expended  out  of  the  parlia- 
mentary vote  transferred  through  the  comptroller  from 
the  exchequer  account.  This  sum  is  transferred  back  as 
receipts.  When  payments  are  made  on  behalf  of  other 
public  departments  the  sums  are  transferred  by  the  head 
office  concerned,  on  production  of  vouchers,  from  the 
account  of  the  office  receiving  the  advance  to  that  of  the 
office  paying  the  money,  and  thence  again  to  the  exchequer 
account  as  receipts. 

Suppose  for  example  that  the  customs  officer  in  A  col- 
lects £i,ooo  on  January  i.  This  £i,ooo  must  be  paid 
into  the  exchequer  account.  He  pays,  however,  £200 
toward  the  expenses  of  the  customs  office  in  A,  £100  for 
the  army,  and  another  £100  for  the  navy.  Out  of  the 
£1,000  he  now  has  £600  for  which  he  obtains  from  his 
bank  a  bill  of  exchange  payable  in  two  or  three  days' 
time  in  London.  He  forwards  this  bill  for  £600  and 
vouchers  for  £400  to  the  head  customs  office  in  London. 
The  bill  is  sent  to  the  Bank  of  England,  is  cashed  by  it 
when  due,  and  the  sum  is  credited  to  the  account  of  the 
customs  department  at  the  Bank.  On  the  same  day  on 
which  the  bill  is  cashed  the  department  transfers  the 
amount  from  its  account  to  that  of  the  Exchequer. 
Thus  £600  out  of  the  £1,000  collected  in  A  on  January  i 
has   been   paid   into    the   consolidated    fund,    while   the 


224 


The     English     Banking     S  y  s  t  e 


m 


remaining  £400  is  only  represented  by  vouchers.  The 
customs  department  in  London  now  forwards  the  vouchers 
for  the  £100  which  have  been  paid  for  the  army  and  navy, 
respectively,  to  the  departments  for  the  army  and  navy, 
which  in  their  turn,  by  means  of  the  paymaster-general, 
through  whom  they  receive  the  money  voted  for  them, 
transfer  each  £100  to  the  account  of  the  customs  depart- 
ment. The  latter  immediately  transfers  the  £200  thus 
realized  to  the  exchequer  account.  In  the  way  already 
described  it  also  receives  the  £200  for  its  own  expenses 
and  transfers  this  back  again.  Thus  finally  the  whole 
£  1 ,000  is  paid  into  the  consolidated  fund  and  at  the  same 
time  the  local  expenses  are  met  on  the  spot. 

{2.)   The  exchequer  account. 

The  government  account  has  been  kept  by  the  Bank  of 
England  since  1834  under  the  name  of  "The  account  of 
His  Majesty's  Exchequer."  Into  this  all  the  public  reve- 
nues are  paid  in  the  shortest  possible  time  after  their  col- 
lection, and  from  it  all  issues  are  made.  The  account  has, 
like  every  other  account,  whether  public  or  private,  kept 
at  the  Bank,  a  credit  and  a  debit  side.  The  receipts 
are  entered  to  the  former,  the  issues  to  the  latter.  Both 
have  subdivisions,  subaccounts  for  the  various  heads  of 
revenue,  and  for  those  accountants  to  whom  public  money 
is  assigned,  either  as  final  payment  or  for  further  distri- 
bution. This  specification  of  the  account  was  ordered  by 
a  treasury  minute  of  March  2,  1855."  The  credit  side  had 
then  nine  subdivisions,  which  represented  the  receipts 
imder  the  various  heads  of  revenue  without   distinguish- 

o  "Report  on  Public  Monies,"  1856,  Ap.  2,  p.  585. 
68299° — II 15  225 


National     Monetary     Commission 

ing  the  ordinary  from  the  extraordinary.  The  debit  side 
distinguished  the  payments  for  the  consolidated  fund  and 
supply  services,  and  subdivided  the  latter  into  the  expen- 
ses for  army,  navy,  and  ordnance.  This  plan  was  retained 
in  essentials,  but  changes  in  detail  have  been  made  which 
particularize  the  receipts  and  expenditure  a  little  further. 
At  present  the  credit  side  has  25  subdivisions,  the  debit 
side  6.  The  appearance  of  the  government  account  is 
now  as  shown  below.     (See  pp.  230,  231.)«* 

o  This  form  is  printed  from  that  used  by  the  Bank  in  sending  its  daily 
statement  of  the  position  of  the  exchequer  account  to  the  Treasury.  Hence 
it  is  not  exactly  like  the  form  described  above.  For  each  heading  a  sepa- 
rate sheet  would  probably  be  used.  But  the  number  of  headings  corre- 
sponds to  the  number  of  subaccounts. 


336 


The     English     Banking     System 


s 

ÜJ 
•^ 


03 


ja    <u  ji 


s  I  II  U 


^   >   % 


n  n 


a  °ö 


^ 


*  r      • 


•S  g  .s  §  .s 


"3    » 


o  -  a 

^    "O    ^ 

«  2    o 


•a    c    o>  '^ 


C3      *-■      — 

SI  I 


ni«aO'oö'oO'q*j 

^:  ;^  fc      >A      Hi      « 


e 
8 

^  ^  I  «      i 

U        >5         Ai 


227 


National     Monetary     Commission 


(^ 


is  3, 

■•3  s 

-  2   c    S   " 


3    <^ 


J2   .2    2   ;§ 

Ö  a  ^  £ 

-Est: 
E 


;>*   _ZL     ^    ^   «*-   ««     »^ 


•s    a 


>   5 
■3  ü 

1.^ 


K   2  <  S  H   H 


■0 

t/2 

«4 

•a  T) 
e   a 


1^ 


1 1 


338 


The     English     Banking     System 

The  subaccounts  on  the  credit  side  of  the  exchequer 
account  include  almost  all  the  heads  of  revenue  which 
appear  in  the  yearly  finance  accounts.  The  divisions 
are  not  however  made  on  the  same  principle.  The  former 
are  distinguished  according  to  the  department  by  which 
the  money  is  paid  into  the  Bank,  the  latter  according  to 
the  nature  of  the  receipts. 

The  subaccounts  on  the  debit  side  are  likewise  dis- 
tinguished according  to  the  offices  which  are  paid  direct 
from  the  Exchequer.  The  arrangement  of  the  offices 
has  not  been  altered  since  1834  except  by  the  consolida- 
tion of  the  pay  offices.  The  paymaster-general's  account 
has  taken  the  place  of  the  accounts  of  the  separate  pay 
offices,  the  rest  remain  unaltered.  Since  all  payments 
must  be  made  through  the  paymaster-general,  money  is 
placed  at  his  disposal  both  out  of  the  consolidated  fund 
and  out  of  the  supplies.  Hence  two  subaccounts  are 
opened  for  the  assignments  made  to  him. 

The  exchequer  account  for  any  given  day  contains  on 
the  credit  side  all  the  receipts  paid  in  up  to  that  time,  and 
on  the  debit  side  all  the  public  issues  made  during  the 
same  period.  Hence  if  the  two  are  compared,  the  result 
gives  the  actual  cash  balance  at  the  disposal  of  the  Govern- 
ment, or  supposing  the  receipts  are  less  than  the  expendi- 
ture, the  cash  deficit.  As  we  have  described  above,  the 
receipts  are  remitted  directly  after  collection  and  are  paid 
into  the  exchequer  account  in  the  course  of  a  few  days. 
In  the  case  of  the  issues,  on  the  other  hand,  it  is  the  rule 
that  only  the  sums  required  for  current  expenses  are 
transferred  from  the  exchequer  account  to  the  paymaster- 
general.     It  follows  that  all  the  sums  transferred  to  the 


329 


National     Monetary     Commission 

issue  departments  for  distribution  are  in  fact  actually 
spent  already;  no  receiver  or  paymaster  has  a  surplus 
balance  of  any  importance,  and  the  balance  on  the 
exchequer  account  represents  the  actual  sum  at  the  disposal 
of  the  Government  for  administrative  purposes. 

The  exchequer  account  is  not  the  account  of  a  dis- 
tinct central  treasury  as  opposed  to  various  other  treas- 
uries. It  is  the  repository'  for  all  public  money.  The 
money  in  the  hands  of  the  paymaster-general,  of  the 
army  agents,  and  of  the  under-paymasters  of  the  navy, 
is  assigned  for  the  payment  of  public  liabilities  which 
already  exist.  The  balances,  which  must  naturally  be 
kept  in  hand  in  these  cases,  are  small,  and  are  kept  small 
by  estimates  made  in  advance  as  accurately  as  p)ossible. 
The  exchequer  account  of  the  I{nglish  fmancial  adminis- 
tration at  the  Bank  of  England  is  the  finest  example  of 
an  economical  centralization  of  public  receipts  and  issues. 
It  gives  the  Treasury  the  advantage  of  an  unusually  clear 
oversight  of  the  financial  position,  and  enables  the  audit 
department  to  check  all  the  movements  of  receipts  and 
expenditure.  Taken  in  conjunction  with  the  remaining 
public  receipt  and  issue  accounts  at  the  Bank,  the  ex- 
chequer account  also  supplies  a  basis  for  the  control 
exercised  by  the  Treasury  over  the  revenue  and  issue 
offices.  As  regards  the  latter,  however,  the  central 
administration  is  concerned  only  with  the  offices  which 
appear  on  the  debit  side  of  the  exchequer  account.  And 
amongst  these  the  office  of  the  paymaster-general  is  the 
only  one  of  importance  as  a  pay  office.  The  others  are 
not  pay  offices;  the  transfers  to  the  Bank  constitute  pay- 
ments in  themselves.     In  both  these  other  cases  there  is  no 


330 


The     English     Banking     System 

question  of  payment  transactions;  what  happens  is  merely 
a  transfer  of  bullion  through  the  mint,  a  repayment  of  pub- 
lic debt  thi-ough  the  commissioners  for  the  reduction  of  the 
national  debt,  and  so  on. 

(3.)   The  paymaster-general  and  his  accounts. 

The  paymaster-general  is  connected  with  every  depart- 
ment  of   the   administration.     All   demands   for   money 
from  these  departments  are  made  to  him.     It  is  his  duty 
to    have    the    required    sums    transferred    through    the 
Treasury— i.  e.,  through   the   auditor-general— from   the 
exchequer  account,  and  then  to  undertake  their  assign- 
ment.    But  he  not  only  receives  money  from  the  Ex- 
chequer.     Deposits    are    frequently   transferred    to    him 
from   the   public   offices,   and   a   portion   of   the   various 
receipts   are    paid    in   through    him.     All    payments    of 
advances  and  repayments  of  arrears  arising  amongst  the 
various  branches  of  the  public  service  pass  through  his 
hands.     Thus  it  is  through  him  that  the  public  assets, 
which  are  concentrated  in  a  large  sum  in  the  exchequer 
account,  are  applied  to  their  proper  purposes  and  dis- 
tributed amongst  the  different  public  services.     So  far 
as  possible  he  carries  out  the  payments  in  detail.     For 
payments   made  outside   London  the   public   offices  are 
assisted   by   the   accountants   and   revenue   officers   sub- 
ordinate to  them. 

The  army  department  has  agents  by  whom  the  pay- 
ments within  certain  districts  are  undertaken.  They 
are  charged  with  the  sums  allotted  by  the  accountant- 
general  of  the  war  office  and  must  present  accounts  of 
their  expenditure.     These  agents  in  their  turn  distribute 


231 


Na  tional     M  o  n  e  t  ar  y     Commission 

the  money  to  the  paymasters  of  the  regiments.  The  same 
method  of  distribution  is  employed  in  the  na\'y.'*  The 
civil  service  is  managed  rather  differently.  In  this  case 
the  Treasury  determines  which  departments  shall  render 
accounts  in  connection  with  the  different  parliamentary 
votes — i.  e.,  shall  undertake  the  distribution  of  the  money 
voted.*  The  accountants  receive  the  money  in  large 
sums  from  the  paymaster-general  and  themselves  under- 
take the  detailed  payments,  making  use  of  the  banks  at 
which  the  district  paymasters  have  accounts. 

In  order  to  meet  his  liabilities  the  paymaster-general 
has  four  accounts  at  the  Bank  of  England:  The  supply 
account,  the  cash  account,  the  drawing  account,  and  the 
bill  account.     He  uses  these  as  follows: 

Into  the  supply  account  he  pays  all  moneys  transferred 
to  him  from  the  Exchequer.  Nothing  is  booked  here 
except  these  transfers.*" 

o  The  agents  employed  by  the  army  department  are  bankers.  At  the 
present  time  there  are  8  army  agents  and  9  navy  agents.  See  Whitaker's 
"Almanack,"  1883,  p.  163.  [There  are  new  3  army  agents  (p.  223)  and  4 
navy  agents  (p.  250.)]  The  proportion  of  payments  for  the  army  made 
by  the  agents  and  by  the  paymaster  general,  respectively,  in  1879  was  as 
follows:  By  agents  at  home,  £8,500,cxx);  abroad,  £4,000,000;  by  the  pay- 
master-general, £5,500,000  ("Minutes  of  Evidence  before  the  India  Com- 
mittee," 1880.  Evidence  of  Mr.  White,  the  accountant-general  in  the 
war  olllce,  on  July  29.). 

*>  The  Budget  of  the  civil  ser\ice  is  divided  into  seven  classes  and  each 
class  is  arranged  according  to  the  different  services  for  which  the  special 
vote  is  made.  This  arrangement  divides  the  contents  according  to  the 
objects  of  the  administration.  For  purposes  of  issue  and  accounts,  how- 
ever, the  votes  for  different  classes  are  paid  into  one  office,  since  the  arrange- 
ment of  offices  does  not  correspond  with  this  division.  A  corresponding 
arrangement  of  the  parliamentary  votes  is  always  used  for  the  civil  service 
estimates.  In  191 1,  70  accounting  ofllcers  made  payments  and  presented 
accounts  for  109  votes  and  3  revenue  departments  for  7  votes. 

c  A  transfer  to  this  account  is  indicated  by  the  words  "Supply  account" 
inserted  next  to  "paymaster-general"  on  the  debit  side  of  the  exchequer 
balance  sheet  as  printed  on  pp.  230,  231. 

232 


The     English     Banking     System 

In  the  cash  account  are  collected  all  sums  deposited  by- 
other  public  departments,  the  repayments  of  advances 
made  by  one  department  to  another,  or  money  paid  direct 
to  the  paymaster- general  as  collector;  in  brief,  all  receipts, 
whether  actual  or  for  transmission,  which  do  not  have  to 
be  paid  to  the  Exchequer,  and  the  receipts  of  the  pay- 
master-general himself. 

These  accounts  are  intended  as  sources  of  supply  for 
the  two  others,  and  their  balances  are  diminished  only  by 
deductions  and  transfers  to  the  latter,  not  by  payments. 
The  payments  are  debited  to  the  drawing  and  bills 
accounts,  which  are  consequently  also  called  the  "working 
accounts." 

All  sums  used  to  cash  the  paymaster's  checks  are  deb- 
ited to  the  drawing  account,  whilst  the  bill  account  sup- 
plies the  money  needed  to  meet  bills  of  exchange  as  they 
fall  due.  The  separation  of  those  accounts  which  are 
only  required  to  act  as  reservoirs,  and  those  actually  used 
in  making  payments,  serves  to  simplify  the  control  of  the 
receipts  in  hand  and  the  payments  made,  and  also  is  a 
protection  against  fraud.  The  position  of  the  supply  and 
cash  accounts  is  known  only  to  the  paymaster-general,  or 
rather  to  the  assistant  paymaster.  He  transfers  money 
from  these  accounts  to  the  two  working  accounts  from 
time  to  time,  daily  or  it  may  be  hourly,  when  demands 
are  pressing.  The  checks  by  reason  of  which  the  actua 
payments  are  made  by  the  Bank  are  issued  by  a  subor- 
dinate official,  the  paymaster.  Since  the  latter  is  ignorant 
of  the  balance  in  the  drawing  account,  he  would  rmi  the 
risk,  in  case  of  an  intentional  fraud,  of  overdrawing.  The 
distinction  between  exchequer  credit  and  cash  receipts, 


233 


National    Monetary     Commission 

represented  by  the  supply  and  cash  accounts,  respectively, 
has  already  been  explained  in  describing  the  division. 
The  cash  account  serv^es,  however,  a  special  function,  which 
makes  it,  as  we  shall  see  later,  particularly  important  in 
the  transactions  of  the  paymaster  general. 

The  whole  administrative  system  makes  demands  daily 
on  the  paymaster-general.  For  the  army  the  controlling 
organ  is  the  War  Office,  for  the  navy  the  Admiralty,  for 
the  civil  service  the  administrative  authorities  supervis- 
ing the  accountants.  The  paymaster- general  must  be 
supplied  with  the  funds  necessary  to  meet  these  demands. 
For  this  purpose  he  applies  daily  to  the  Treasury,  to  which 
he  sends  a  statement  of  the  payments  made  on  that  day 
and  of  those  which  will  probably  have  to  be  made  on  the 
next  day.  This  estimate  is  based  partly  on  the  amounts 
actually  known  to  be  needed  to  meet  bills  of  exchange 
falling  due,  partly  on  a  calculation  of  external  transac- 
tions, of  the  requirements  in  previous  years,  and  so  on. 
The  demands  of  the  different  departments  on  the  pay- 
master-general are  accompanied  by  a  specification  of  the 
vote  on  account  of  which  the  issue  is  required,  and  of  the 
fund  (consolidated  fmid  or  supply)  to  which  the  payment 
is  charged.  The  paymaster  demands  money  from  the 
Treasury  in  the  same  form.  The  actual  transfers  are 
made  in  a  lump  sum.  Suppose,  for  example,  that  £50,000 
is  needed  for  the  army,  £50,000  for  the  navy,  and  £50,000 
for  various  civil  service  expenses;  the  comptroller-general, 
acting  on  the  instructions  of  the  Treasury,  would  transfer 
£150,000  from  the  Exchequer  accomit  to  the  supply  ac- 
count of  the  paymaster-general.     Then  the  assistant  pay- 


234 


The     English     Banking     System 

master  transfers  the  required  sums  at  intervals  to  the 
drawing  and  bill  accounts. 

Although  the  paymaster- general  regards  as  a  single 
fund  the  sums  standing  at  his  disposal  for  issue,  and  meets 
all  demands  out  of  the  one  balance,  he  is  not  justified  in 
regarding  them  as  all  alike  without  further  examination, 
and  in  satisfying  every  claim.  In  his  books,  on  the  con- 
trary, the  various  votes  are  distinguished.  This  separa- 
tion of  votes  is,  however,  carried  out  only  in  so  far  as 
the  appropriation  of  money  by  Parliament  demands  the 
application  of  definite  amounts  to  definite  objects.  The 
army  and  navy  have  the  right  to  make  transfers  within 
their  respective  votes,  provided  that  the  total  amounts 
voted  for  the  two  services  are  adhered  to."  The  pay- 
ments made  on  the  civil  list  are  carried  out  according  to 
the  classes  established  by  i  Vict.,  c.  2.  The  expenditure 
for  the  civil  service  is  divided  according  to  the  different 
parliamentary  votes,  which  are  distinguished  in  the  books 
of  the  paymaster-general  according  to  the  separate  serv- 
ices for  which  they  were  made. '' 

When  a  claim  is  made  for  the  civil  service  the  pay- 
master-general's own  officials,  the  so-called  examiners, 
compare  it  with  its  accompanying  voucher.  If  the  ex- 
aminers find  nothing  of  note  they  forward  the  papers  to 
the  officer  responsible  for  the  assignment  of  the  money — 

o  "  Provided  always  that  the  Issues  for  Army  and  Navy  Services  shall 
be  made  under  the  general  Heads  of  'Army'  and  'Navy,' respectively." 
(29  and  30  Vict.,  c.  39,  s.  15.) 

Ö  These  agree  in  substance  with  the  arrangement  of  parliamentary  votes 
used  in  the  existing  civil  service  estimates.  But  there  they  are  distin- 
guished by  reference  to  the  persons  responsible,  the  accountants,  whilst 
in  the  books  of  the  paymaster-general  the  arrangement  in  classes  is 
adhered  to  and  each  class  is  credited  with  the  amount  of  its  vote. 


23s 


National     M  o  7j  e  t  a?'  y     Commission 

i.  e.,  to  the  paymaster,  whose  business  it  is  to  issue  the 
checks.  He  in  his  turn  sends  them  to  the  assistant  pay- 
master, by  whom  they  are  arranged  according  to  the  dif- 
ferent votes  to  which  they  belong  and  are  entered  in  a 
book,  which  book  is  also  looked  at  by  the  examiners  on 
the  following  day.  The  sum  to  be  paid  is  at  the  same 
time  booked  in  the  assistant  paymaster's  office.  At  the 
beginning  of  the  year,  after  the  opening  of  the  general 
audit,  each  of  the  separate  classes  mentioned  above  is 
credited  with  the  whole  sum  allotted  to  it.  The  account 
is  then  debited  with  each  payment  made  in  the  course  of 
the  year.  This  method  of  bookkeeping  used  by  the  pay- 
master-general makes  it  possible  to  control  the  whole 
expenditure  of  the  Government  in  as  much  detail  as  is 
desired,  from  the  one  standpoint.  It  is  still  possible  for 
the  department  making  the  demand  to  misapply  the 
money  assigned  to  it  under  a  particular  vote.  Such 
transfers  are  indeed  allowed,  if  subsequently  justified,  in 
the  case  of  the  most  important  departments,  the  army 
and  navy;  in  the  civil  service  they  are  rare  because  most 
of  the  payments  in  this  case  are  made  in  London  by  the 
paymaster-general  direct. 

It  frequently  happens  that  the  claims  made  on  the 
paymaster-general  do  not  correspond  with  the  sums  which 
he  has  demanded  from  the  Treasury.  If  we  refer  again  to 
the  example  given  above,  it  may  happen  that  he  has 
demanded  £50,000  for  the  army,  navy,  and  civil  service, 
respectively,  while  the  actual  claims  made  are  £40,000 
for  the  army,  £60,000  for  the  navy,  and  £40,000  for  the 
civil  service.  He  will,  however,  making  use  of  his  general 
authorization,   satisfy   the   increased   demand   from   the 


236 


The     English     Banking     System 

navy,  debit  it  with  the  same  in  his  books,  and  make  good 
the  difference  by  demanding  an  additional  £10,000  for 
the  navy  on  the  following  day.  So  long  as  the  credit 
allowed  in  the  books  of  the  paymaster-general  for  the 
different  public  services  is  not  exceeded  it  is  absolutely 
unimportant  whether  the  demands  of  the  departments  for 
these  amounts  are  covered  by  the  transfers  made  by  the 
Treasury,  or  rather  by  the  auditor-general.  The  transfers 
of  the  latter  are  made  merely  in  order  to  supply  the  pay- 
master-general with  the  required  balance.  The  appro- 
priation for  the  public  services  is  made  through  him  and 
is  only  known  subsequently  to  the  Treasury  and  to  the 
audit  department  through  his  statement.  Hence  these 
appropriations  can  not  be  controlled  beforehand  by  the 
Treasury  and  Audit  department,  because  the  paymaster- 
general  has  always,  in  his  cash  account,  sums  which  he 
must  use  before  demanding  an  exchequer  credit.  His 
payments  are  thus  to  a  certain  extent  independent  of  the 
assignments  from  the  Exchequer.  In  the  cash  account 
accumulate  deposits  from  the  public  offices,  repayments 
of  advances  from  one  office  to  another,  and  so  on.  The 
money  in  it  has  always  been  assigned  already  to  certain 
public  services.  The  following  example  will  show  how 
these  sums  are  used  by  the  paymaster-general  for  his 
payments. 

It  may  happen  that  the  fleet  has  made  over  to  a  foreign 
country  a  portion  of  its  accumulated  stores.  This  loan  is 
repaid  in  course  of  time,  not  in  kind  but  in  money.  The 
money  belongs  to  the  navy,  which  has  temporarily  dis- 
posed of,  and  afterwards  received  back  again,  a  portion  of 
the  amount  voted  for  it  in  Parliament.     Suppose  it  is  a 


337 


National     Monetary     Commission 

matter  of  £100,000.  This  sum  can  not  be  paid  into  the 
Exchequer — i.  e.,  into  the  consoHdated  fund — for  it  does 
not  represent  revenue.  It  is  merely  a  sum  whose  expen- 
diture the  department  has  deferred  and  which  will  in  the 
future  be  used  up  again.  The  £100,000  is  thus  paid  into 
the  account  of  the  paymaster-general,  and  is  placed  by 
him  in  the  cash  account.  At  the  same  time  he  credits  the 
amount  to  the  account  of  the  navy. 

As  long  as  this  sum  is  in  the  cash  account  the  drawing 
account  must  be  replenished  from  it.  The  payments 
which  are  made  during  the  next  few  days  will  be  met  out 
of  it.  But  the  money  thus  used  to  meet  all  demands  from 
all  departments  belongs  to  the  navy.  The  consent  of 
Parliament  must  have  been  obtained  for  these  same 
demands  in  order  that  they  may  be  met  at  all.  The 
money  from  these  votes  must  be  assigned  to  these  de- 
mands, which  must  ultimately  be  brought  into  agreement 
with  the  amounts  voted.  This  correspondence  is  shown 
in  the  books  of  the  paymaster-general  as  soon  as  the 
payments  have  been  made.  In  the  Treasury,  however, 
the  credits  of  the  departments  concerned  appear  no  fur- 
ther affected  in  spite  of  the  satisfaction  of  the  claims.  In 
the  daily  statement  sent  to  the  Treasury  by  the  paymaster- 
general,  these  demands  will,  however,  appear;  they  will 
be  noted  as  "overdrawn" — i.  e.,  as  provided  with  no 
funds  from  the  Exchequer.  After  a  few  days  the  pay- 
master will  demand  credit  for  the  departments  which 
were  overdrawn.  He  will  receive  this  through  his  supply 
account  and  will  now  continue  to  work  in  the  usual  man- 
ner. The  navy  is  assured  of  its  £100,000  since  it  had 
been  credited  with  this  amount  by  the  paymaster-general ; 


3^8 


The     English     Banking     S  y  s  t  e 


m 


a  confusion  between  permanent  and  temporary  receipts 
is  prevented  by  the  separation  of  the  cash  account  from 
the  others,  and  the  retention  of  an  unnecessary  balance  is 
avoided  by  the  speedy  employment  of  the  money  in  the 
cash  account.  The  principle  of  a  single  fiscal  treasury — 
i.  e.,  of  the  concentration  of  the  supplies  in  a  single  fund, 
divided  in  the  books  according  to  the  different  services  for 
which  it  is  intended — is  thus  carried  out  to  its  fullest 
extent. 

The  method  described  above  of  meeting  claims  against 
the  administration  is  applicable  only  Avhere  grants  have 
been  made  in  the  budget.  It  happens,  however,  in  a 
country  like  England,  whose  fleet  and  troops  are  scattered 
throughout  the  world,  that  demands  are  made  on  the 
Government  for  which  no  provision  has  been  made  by 
parliamentary  grant,  and  whose  satisfaction  can  not  be 
deferred  until  the  consent  of  Parliament  has  been  obtained. 
In  such  a  case  the  paymaster-general  must  refuse  to  pay 
out  the  money  from  the  Exchequer,  since  the  sum  de- 
manded is  not  charged  on  the  consolidated  fund,  nor  can 
any  parliamentary  authority  be  claimed  for  its  payment. 
In  order  that  the  Government  may  not  be  left  entirelv 
helpless  in  such  a  case  Parliament  itself  has  provided  a 
way  of  escape.  "The  public  interests  require  that  the 
Government  should  possess  the  power  of  incurring 
expenses  of  indispensable  necessity,  although  Parliament 
may  not  have  previously  provided  for  them.  *  *  * 
Unforeseen  events  may  happen  and  lead  to  an  expendi- 
ture beyond  the  provision  made  by  Parliament  for  the 
ordinary  service  of  the  year;  and  it  must  be  for  the 
interest  of  the  public  that  no  delay  should  occur  in  taking 


239 


N  at  io  72  a  I    Monetary     Commission 

the  necessary  measures,  and  in  defraying  the  expenses 
which  such  events  may  entail.""^ 

A  fund  exists  called  the  "treasury'  chest  fund"  ''whose 
purpose  is  to  supply  money  for  the  service  of  the  army 
and  navy  abroad  and  for  the  colonial  governments,  in 
unforeseen  emergencies.  This  fund  must  amount  to  not 
less  than  £700,000  and  not  more  than  £1,000,000  (56 
Vict.,  c.  18).  The  sum  is  fixed  by  the  Treasur}^  in  a 
minute  which  is  laid  before  Parliament.  The  Treasury 
is  authorized  to  use  it  as  "a  Banking  Fund  for  facilitating 
Remittances  and  for  temporary  advances  for  Public  and 
Colonial  Services  to  be  repaid  out  of  the  monies  appro- 
priated by  Parliament  to  such  services  or  otherwise  appli- 
cable thereto."  The  governors  of  the  colonies  are  per- 
mitted to  take  advances,  in  cases  of  urgent  need,  out  of 
the  treasury  chest,  which  advances  must  be  paid  back 
out  of  money  voted.  The  treasury  chest  is  controlled 
by  the  Treasury  Chest  officers.  (In  191 1  there  are  11 
of  these  in  the  Colonies  and  Egypt.)  They  have  how- 
ever no  separate  fund  kept  apart  in  the  Bank  as  a  treas- 
ury chest  fund.  The  money  is  not  divided.  Neither 
have  they  a  direct  power  of  assignment.  They  must  on 
the  contrary  apply  like  anyone  else  to  the  paymaster- 
general — i.  e.,  to  the  Treasury — stating  the  total  demands 

«See  Parliamentary  Report  quoted  by  Alphaeus  Todd,  "Parliamentary 
Government  in  England,"  ed.  1892,  Vol.  II,  p.  244. 

b  It  arose  out  of  the  "army  extraordinaries"  from  which  in  earlier  times 
advances  were  made  to  the  public  accountants  and  other  departmentsabroad. 
"Memorandum  on  Commissariat  Chest  Account"  by  Mr.  Anderson,  1840. 
"Report  on  Public  Monies,"  1856,  p.  589.  "Memorandum,"  1850,  loc 
cit.,  p.  607.  "Draft  of  a  Bill  for  Limiting  and  Regulating  the  Commis- 
sariat Chest  Fund,"  1851,  loc.  cit.,  p.  613.  "Minutes  of  Evidence  before 
the  Select  Committee,"  1856.  "Report  on  Public  Monies,"  1856,  p.  7. 
Treasury  Chest  Fund  Act,  56  Vict.,  c.  18. 


240 


The     English     Banking     System 

which  he  has  received  on  the  treasury  chest.  They  are 
however  obliged  to  see  that  the  money  taken  from  the  fund 
and  the  advances  made  are  repaid  out  of  the  sums  voted 
for  the  army  and  navy,  or,  in  the  instances  cited,  for  the 
colonies.  The  treasury  chest  is  intended  only  to  make 
it  possible  to  meet  expenses  until  such  times  as  Parlia- 
ment has  made  further  provision  for  them,*^ 

Besides  this  there  is  a  second  fund  to  meet  similar 
necessities  in  the  civil  service.  This  is  called  the  "civil 
contingencies  fund"  and  is  limited  to  £120,000.''  The 
Treasury  controls  this  fund  and  it  alone  is  empowered  to 
draw  out  money  occasionally  to  meet  "new  and  unfore- 
seen expenditure  for  civil  services  at  home,  for  whicli  no 
votes  have  been  taken,  or  to  meet  unforeseen  deficiencies 
on  ordinary  votes.  *  *  *  Nq  expenditure  may  be  per- 
manently charged  to  this  fund.  All  such  payments  form 
the  subject  of  subsequent  votes,  and  the  money  advanced 
must  be  repaid  out  of  these  subsequent  votes. "<=  By  the 
paymaster-general  act  (53  Vict.,  c.  53)  the  commissioners 
of  the  Treasury  were  authorized  to  make  regulations  to 
transfer  to  the  Bank  any  of  the  duties  of  the  paymaster- 
general;  to  alter  the  existing  regulations  for  the  conduct 
of  business  in  this  office;  and,  in  the  case  of  funds  which 
had  to  stand  in  the  name  of  the  paymaster  jointly  with 
that  of  any  other  person,  to  substitute  for  the  paymaster 
any  officer  of  the  Bank  of  England.  All  such  regulations 
must  be  laid  before  Parliament  within  tliree  weeks  after 

«The  balance  of  the  Treasury  Chest  Fund  for  1909-10  is  printed  in  tlie 
Appendix. 

&  It  arose  out  of  the  "civil  contingencies  votes,"  yearly  grants  for  a 
fund  to  be  applied  to  the  purposes  stated  (index  to  "Report  on  Public 
Monies,"  1886.     Voce  "Civil  Contingencies,"  pp.,  33  and  34.) 

°Todd,  loc.  cit.,  pp.  244,  245. 

68299°— II— — 16  241 


National    Monetary     C o  m  m  i s s  io 


n 


they  are  made.  The  paymaster-general  act  seems  to 
show  a  tendency  to  ehminate  this  office  of  middlemen  by 
degrees;  hitherto  the  act  has  received  no  practical 
application. 

{4)  Provisions  for  covering  the  cash  deficit. 

It  was  customary  until  the  middle  of  the  nineteenth 
century  to  vote  certain  taxes  annually,  and  to  apply  them 
to  meet  the  expenditure  agreed  to  annually,  in  contra- 
distinction to  the  revenues  which  were  combined  in  the 
consolidated  fund.  The  sugar  tax  was  voted  in  this  way 
until  1846.  Since  that  time,  however,  the  total  public 
revenue  has  been  paid  into  the  consolidated  fund.  The 
expenditure  agreed  to  yearly  is  met  out  of  the  surplus  of 
the  consolidated  fimd  over  the  payments  charged  to  it. 
There  is  no  division  of  the  receipts  but  only  of  the  issues, 
and  the  ways  and  means  act  which  assigns  the  money  for 
the  outlay  voted  yearly — i.  e.,  the  supply  services — does 
this  by  appropriating  the  surplus  from  the  consolidated  fund 
for  these  purposes.  Thus  for  bookkeeping  purposes  the 
consolidated  fund  ser\'ices  and  the  supply  ser\'ices  are  to 
be  regarded  as  distinct.  The  former  has  the  priority, 
and  if  the  public  receipts  are  insufficient  to  cover  the 
expenditure,  fresh  provision  must  be  made  for  the  supply 
services.  This  difference  is  sho\vTi  clearly  by  the  manner 
in  which  a  deficit  is  covered  in  each  case. 

Thus  at  the  end  of  each  quarter  (the  first  ending  on 
Mar.  31),  the  Treasury  draws  up  a  return  of  the  receipts 
and  charges  on  the  consolidated  fund.  In  the  charges  arc 
included  the  interest  on  the  public  debt  which  will  fall 
due  during  the  first  days  of  the  succeeding  quarter.     The 


343 


The     English     Banking     System 

balance  between  the  receipts  and  expenditures  shows 
whether  the  revenue  paid  in  during  the  past  quarter  is 
sufficient  to  meet  all  those  charges,  or  how  great  the  final 
deficit  will  be. 

A  copy  of  this  retrun  is  forwarded  to  the  comptroller 
and  auditor-general,  who,  after  he  has  convinced  himself 
of  its  correctness,  notifies  the  Bank  of  England  of  the 
amount  of  the  possible  deficit.  This  notice  empowers  the 
Bank  to  advance  during  the  next  quarter,  on  a  written 
demand  from  the  Treasury,  a  sum  not  exceeding  the 
amount  of  the  deficit.  The  rate  of  interest  on  this  ad- 
vance is  agreed  upon  between  the  Bank  and  the  chancellor 
of  the  exchequer.  Usually  it  amounts  to  2  or  3  per  cent. 
This  loan  is  made  by  crediting  the  exchequer  account 
with  the  sum  advanced:  the  loan  has  to  be  repaid  out  of 
the  growing  receipts  of  the  consolidated  fund  during  the 
quarter  in  which  the  advance  is  made.  The  repayment 
is  made  by  simply  writing  off  the  debt.  This  is  the  so- 
called  deficiency  advance,  which  has  taken  the  place  of 
the  deficiency  bills.  It  is  repeated  almost  every  quarter, 
since  the  Treasury  finds  it  more  convenient  to  borrow 
money  for  short  periods  than  to  keep  large  balances  during 
a  long  period.  The  receipts  and  issues  connected  with 
the  consolidated  fund  are  so  steady  that  they  are  balanced 
without  any  difficulty  in  the  course  of  the  year. 

It  is  otherwise  with  the  supply  services,  which  can  more 
easily  lead  to  a  disturbance  in  the  financial  system.  An 
unexpected  declaration  of  war,  for  example,  leads  to 
sudden  demands  on  the  public  money  for  which  no  pro- 
vision has  been  made.  In  such  a  case  the  Treasury  can 
demand  a  loan  from  the  Bank  in  the  same  way  as  in  the 


243 


National    Monetary     Commission 

case  of  the  deficiency  advance;  it  is  bound  to  pay  this 
back  out  of  the  current  receipts  during  the  succeeding 
quarter.  If  this  is  impossible,  i.  e.,  if  the  demand  is  so 
large  that  it  can  not  be  met  by  a  possible  increase  in  the 
receipts  during  the  following  quarter,  application  must 
be  made  to  Parliament  to  supply  the  necessary  money. 
For  in  such  a  case  the  cash  deficit  is  not  merely  due  to  a 
disparity  of  time  between  the  outlay  and  the  receipt  of 
the  revenue,  but  is  a  real  deficit  resulting  from  the  inade- 
quacy of  the  total  revenue  as  compared  with  the  total 
expenditure. 

This  kind  of  loan  is  called  a  ways  and  means  advance, 
and  has  taken  the  place  of  the  ways  and  means  bills.  It 
also  leads  merely  to  a  debt  in  the  books  and  is  of  a  tem- 
porary nature  unless  its  peculiar  character  causes  it  to 
be  converted  into  a  genuine  unfunded  debt.  By  50  Vict., 
c.  16,  the  interest  on  these  advances,  in  so  far  as  they 
then  existed,  was  included  in  the  permanent  annual  charge 
for  the  national  debt. 

(3)   Methods  of  payynent. 

The  connection  between  the  public  treasury  and  the 
Bank  naturally  leads  to  the  use  of  the  forms  customary 
in  banking  for  most  of  the  government  payments.  These 
payments  may  be  classified  as  book  transfers,  payments 
by  check,  and  payments  by  bills  of  exchange. 

Transfers  can  necessarily  only  take  place  when  the 
office  making  the  payment  and  the  payee  have  accounts 
at  the  same  bank.  They  are  not,  however,  confined  to 
the  Bank  of  England,  since  both  offices  and  individuals, 
outside  London,  where  it  is  necessary,  have  accounts  at 


24-^ 


hf' 


I 


The     English     Banking     System 

local  banks.  But  this  is  done  as  little  as  possible,  as  the 
aim  is  to  make  all  payments  through  the  Bank  of  Eng- 
land. In  addition  to  the  accounts  already  mentioned, 
viz,  those  of  the  Exchequer,  the  revenue  department,  the 
paymaster-general,  the  master  of  the  mint,  and  the  com- 
missioners for  the  reduction  of  the  national  debt,  we 
must  notice  that  accounts  at  the  Bank  are  possessed  by 
the  commissioners  of  loans  and  public  works,  the  receiver 
of  the  metropolitan  police,  the  seven  state  prisons,  and 
some  others.  Other  accounts  which,  though  not  public 
accounts,  are  of  importance  in  payment  transactions,  are 
those  of  the  individual  agents  who  keep  tjieir  cash  at  the 
Bank  although  not  obliged  to  do  so.  All  payments  which 
the  said  offices  and  the  agents  have  to  make  amongst 
themselves  are  managed  by  simple  "writs-off" — i.  e., 
by  written  instructions  to  the  Bank  to  transfer  a  sum 
from  one  account  to  another. 

The  transfers  "■  in  the  books  of  the  paymaster-general 
must  be  distinguished  from  these  book  transfers  at  the 
Bank.  By  the  former,  repayments  are  made  from  one 
department  to  another  by  a  simple  prrocess  of  book  entry. 
This  process  has  already  been  referred  to  in  connection 
with  the  cash  account.  It  is  convenient  to  distinguish  it 
from  the  other  form  of  book  transfer  because  it  is  really 
a  question  of  refunding  by  a  method  of  bookkeeping  and 
not  of  actual  payments.  Both  have,  however,  one  advan- 
tage in  common — they  avoid  the  transfer  of  coin. 

All  transfers  of  money  between  the  head  offices  of  the 
Government  are  thus  accomplished  by  book  entries  merely. 

oThey  were  regulated  by  the  Treasury  on  December  22,  1848,  §10.  Cf. 
also  Mr.  Anderson's  "Remarks  on  Lord  Monteagle's  Memorandum  on  the 
Exchequer,"  1854.     "Report  on  Public  Monies,"  1856,  p.  556. 

245 


National    Monetary     Commission 

It  may  happen  also  that  an  individual  claimant  has 
an  account  at  the  Bank.  In  this  case,  too,  pay- 
ment will  be  made  by  book  transfer."  This  process 
consists  merely  in  writing  off  the  sum  from  the  one 
account  and  crediting  it  to  the  account  of  the  payee;  it 
is  accomplished  on  the  spot,  and  can  be  immediately 
checked  by  both  offices. 

The  employment  of  bills  of  exchange  for  the  transfer 
of  money  by  public  authorities  has,  as  we  have  seen, 
been  usual  in  Knglish  finance  for  about  a  hundred  years. 
The  revenue  is  now  remitted  to  London  entirely  by  bills 
of  exchange.  Payments  abroad  and  also  contractual  pay- 
ments are  made  almost  without  exception  in  this  way. 
Payment  by  bill  of  exchange  has  been  expressly  ordered 
by  act  of  Parliament  in  the  case  of  some  payments  at 
home.**  These  are  dravNTi  either  on  the  Treasury,  the 
paymaster-general,  or  the  Admiralty;  are  accepted  by 
a  stated  official  there,  und  arc  always  payable  at  the 
Bank  of  England  from  the  bill  account  of  the  paymaster- 
general.  «^ 

Each  day  the  paymaster-general  sends  the  Bank  a  list 
of  bills  about  to  fall  due.  This  list  is  signed  by  an  offi- 
cial appointed  for  the  purpose  by  the  paymaster-general, 

«»This  was  provided  by  a  treasury  minute  of  December  22,  1848,  §134. 
"  But  where  claimants  have  accounts  of)ened  at  the  Bank  of  England,  the 
payments  arc  in  all  practicable  cases  to  be  made  by  a  writ  off  or  transfer 
order  in  preference  to  a  check  payable  to  bearer." 

^11  Geo.  IV,  c.  JO,  1830,  provides  that  certain  pensions  may  be  paid 
by  bills  of  exchange,  which  can  be  drawn  un  any  collector;  2  and  3  Will. 
IV,  c.  106,  183:1,  makes  a  similar  provision  for  army  pensions,  at  the  same 
time  limiting  the  right  to  persons  residing  on  English  soil. 

c  Minute  of  Dec.  22,  1848,  §19:  "  All  bills  of  exchange,  whether  accepted 
at  the  Treasury,  at  the  Admiralty,  or  at  the  Pay  office  itself,  are  made  payable 
on  the  Paymaster-General's  Bill  Account." 


346 


The     English     Banking     System 

and  serves  as  an  order  to  the  Bank  to  honor  the  bills 
included  therein  when  they  are  presented. 

Unless  a  special  form  of  payment  is  ordered  by  Parlia- 
ment, the  method  is  left  to  the  discretion  of  the  various 
authorities.  There  is  no  single  rule  determining  the 
payments  for  the  whole  Government.  Hence  the  use  of 
bills  of  exchange  is  specially  regulated  for  each  branch 
of  the  public  service.'' 

Payments  by  check,  like  the  book  transfers,  require 
a  bank  account,  but  the  payee  need  not  possess  one. 
Hence  payments  by  check  are  much  more  widely  used 
than  book  transfers,  and  in  particular  for  small  payments, 
whereas  book  transfers  are  generally,  though  not  always, 
made  for  large  sums.  In  this  connection  the  payments 
of  the  paymaster- general  are  specially  to  be  noted,  for 
the  payments  of  all  the  public  departments  are  made 
through  him  whenever  possible.  When  it  is  necessary, 
indeed,  he  places  large  sums  at  the  disposal  of  the  different 
departments,  leaving  to  them  the  further  distribution, 
but  he  also  takes  a  considerable  share  in  the  detailed 

o  In  the  case  of  the  navy,  which  most  often  has  occasion  to  use  bills  of  ex- 
change, the  provisions  referring  to  their  use  are  contained  in  "The Queen's 
Regulations  and  Admiralty  Instructions  for  the  Government  of  Her  Majesty's 
Naval  Service"  (Feb.  13,  1879,  pp.  499-515).  The  accountant  officer  of 
every  ship  has  the  right,  subject  to  the  consent  of  the  captain,  in  ports 
where  there  is  no  navy  office,  and  no  treasury  chest,  to  draw  a  bill  falling 
due  three  days  after  sight  on  the  accountant-general  of  the  Admiralty. 
The  rate  of  discount  must  be  certified  upon  the  actual  bill  by  the  British 
consul  or  two  reputable  merchants.  At  the  same  time  a  "  letter  of  advice, ' ' 
countersigned  by  the  captain,  must  be  dispatched  to  the  accountant- 
general.  To  meet  chance  expenditures  the  accountants  carry  ready  money 
with  them,  the  total  being  limited,  however,  to  £65  in  the  smallest  ships 
and  £300  in  the  largest.  Further,  every  member  of  a  ship's  company  can 
transmit  money  home  through  the  accountant,  who  draws  a  bill  upon  the 
paymaster-general  for  the  sum  which  is  handed  to  him,  and  dispatches  it  to 
the  address  indicated. 


24; 


National      Monetary       Commission 

payments.  Local  payments  are  made  through  the  col- 
lectors; the  repayments  to  the  revenue  departments  are 
made  by  the  paymaster  by  means  of  book  transfers; 
naval  expenses  abroad,  and  contractual  payments,  are 
managed  through  bills  of  exchange  which  the  paymaster 
has  to  honor  by  an  order  on  the  bill  account.  There 
remain  the  payments  of  the  civil  list  and  of  the  civil 
service  and  army,  so  far  as  these  obligations  are  not  ful- 
filled in  the  ways  already  mentioned.  If  the  payments 
fall  due  in  London  they  are  made  through  the  paymaster- 
general,  and,  with  few  exceptions,  by  check." 

All  sums  over  £50  must  in  fact  be  paid  by  check.  For 
sums  between  £5  and  £50  the  payee  may  choose  whether 
he  will  take  a  check  or  coin.  Sums  under  £5  are  always 
paid  in  coin.  For  sums  which  exceed  a  certain  amomit 
the  check  is  crossed.  Each  check  is  signed  by  two  of  the 
officials  of  the  paymaster-general,  examples  of  whose 
signatures  are  kept  at  the  Bank.''  All  checks  are  paid 
from  the  drawing  accomit.  For  payments  by  coin  the 
paymaster-general  daily  receives  from  the  Bank  a  sum 
in  coin  corresponding  to  the  amoimt  he  expects  to  need. 

<»  As  early  as  1836  a  ireasur)' minute  of  .\ug.  19  states  that:  "No  payment 
whatever  is  now  made  by  the  Army  Pay  Ofllce,  be  the  amount  ever  so  small 
except  by  means  of  a  check  on  the  Bank  of  England."  By  the  consolida- 
tion of  the  pay  offices,  the  paymaster-general  succeeded  to  this  practice 
within  the  limits  stated  in  the  text.  The  ordnance  pay  office  pays  in  cash 
salaries,  half-pay,  pensions;  the  navy  pay  office,  sums  under  £5- 
("  Report  on  Public  Monies,"  1856,  p.  498.) 

'»A  general  authorization  is  sent  beforehand  to  the  Bank:  "You  are 
authorized  to  pay  on  the  countersignature  of  Mr.  So-and-So  checks  for 
public  services  drawn  upon  my  drawing  account  by  the  person  thereby 
appointed  to  that  duly." 


348 


I 


The     English     Banking     S  y  s  t  e 


m 


(6)   The  control  over  money  transfers. 

Without  describing  the  bookkeeping  itself  in  more 
detail,  it  is  necessary  to  explain  how  and  to  what  extent  the 
Treasury  and  the  audit  department  supervise  the  transfers 
of  money  between  the  various  offices.  It  is  clear  from 
what  precedes  that  the  whole  financial  system  is  so  cen- 
tralized that  all  public  receipts  are  entered  in  the  exchequer 
account  and  all  issues  must  be  made  from  this  account. 
But  it  is  evidently  not  sufficient  for  the  Treasury  to  super- 
vise this  account  alone,  noting  the  variations  in  it  due  to 
the  in  and  out  flow  of  money.  Except  in  cases  where  the 
receipt  and  issue  offices  manage  their  own  money  inde- 
pendently, the  Treasury  must  see  that  the  former  hand 
over  their  balances  correctly,  and  that  the  latter  make  a 
proper  application  of  the  money  supplied  to  them.  For 
purposes  of  finance  it  aims  at  preventing  the  accumulation 
of  any  superfluous  cash  balance,  while  for  purposes  of  con- 
trol it  aims  at  hindering  or  quickly  detecting  any  fraud, 
and  finally,  for  purposes  of  administration,  it  must  have  a 
grasp  of  the  entire  position  of  the  public  finances  as  regards 
both  revenue  and  expenditure. 

Since  the  revenues  are  remitted  to  London  and  credited 
to  the  accounts  of  the  revenue  departments,  the  contents 
of  the  latter  at  any  time  show  the  exact  position  of  the 
receipts  throughout  the  country  during  the  preceding  days. 
The  Treasury  obtains  in  addition  full  information  concern- 
ing the  local  expenditure  from  the  system  of  accounts 
which  we  have  described.  All  other  issues  are  managed 
by  the  Treasury  itself,  and,  since  they  involve  alterations 
in  the  accounts  at  the  Bank,  and  in  the  books  of  the  pay- 
master-general, an  examination  of  these  books  and  of  the 

249 


National      Monetary       Commission 

bank  accounts  gives  complete  knowledge  of  the  monetary 
transactions  at  the  public  oflices. 

The  miscellaneous  receipts  are  managed  by  the  Treasury 
itself,  so  that  the  revenue  departments  which  remain  to  be 
supervised  are  the  customs,  inland  revenues,  post  and 
crown  lands  offices.  Each  of  these  offices  sends  a  daily 
statement  to  the  Treasury  of  the  receipts  transferred  by  it 
to  the  exchequer  account,  but  not  of  the  receipts  actually 
collected  by  it.  The  Treasury  receives  a  weekly  return 
from  the  inland  revenue  office  specifying  the  total  receipts 
under  their  various  heads.  This  furnishes  an  exact 
account  of  the  receipts  collected  by  the  office  in  the  course 
of  the  week.  The  customs  office  sends  in  a  similar  state- 
ment every  month.  Finally  the  offices  of  the  inland  reve- 
nue, the  customs,  and  the  post"  send  the  Treasur}'  four 
times  a  year  a  balance  sheet,  so-called,  which  contains  a 
specific  account  of  the  receipts  paid  in,  the  payments  made, 
and  the  transfers  to  the  Uxchcquer.  By  means  of  these 
various  returns  the  Treasury  learns  (i)  daily,  how  nuich 
the  offices  have  i)ai(l  into  the  exchequer  account;  (2) 
weekly  or  monthly,  the  amount  received  during  the  period 
under  the  different  heads,  at  the  two  most  important 
revenue  offices;  (3)  cjuarterly,  how  great  the  receipts  and 
issues  have  been  during  the  last  three  months,  under  which 
heads  the  issues  have  been  made,  and  what  balance  the 
three  revenue  offices  hold. 

All  these  returns  can  be  verified  by  comparison  with  the 
returns  which  the  Bank  nmst  supply  to  the  Treasury,  and 
they  in  their  tuni  are  intended  to  serve  as  a  check  upon  the 
statements  of  the   Bank.     The   Bank  forwards  a  daily 

o  The  crown  lands  office  forwards  no  special  specification. 
350 


The     English     Banking     System 

return  of  the  exchequer  account.«  This  specifies  on  the 
credit  side  the  various  heads  of  the  revenue,  and  thus  shows 
how  much  has  been  paid  into  the  account  under  each  of 
these.  The  sums  here  specified  must  correspond  with 
those  given  in  the  returns  of  the  revenue  departments 
themselves,  and  any  discrepancy  is  at  once  inquired  into. 
A  detailed  comparison  of  this  return  with  the  weekly  and 
monthly  returns  of  the  inland  revenue  and  customs  offices 
shows  also  how  large  the  daily  balances  at  these  offices 
have  been.  Besides  this  daily  statement  the  Bank  also 
sends  in  a  weekly  return,  showing  the  position  of  all  the 
public  accounts,  from  which  the  Treasury  can  see  at  once 
the  position  of  the  various  revenue  departments.  This  in 
its  tm*n  serves  to  check  the  statement  of  the  balance  in 
hand,  which  may  be  shown  in  one  of  the  quarterly  returns 
which  have  to  be  presented  by  the  revenue  departments. 
The  returns  of  the  paymaster-general  combined  with  those 
of  the  Bank  make  it  possible  to  supervise  the  management 
of  the  issues.  Together  with  the  daily  claims  for  money  a 
return  is  sent  in  which  states  the  amoimts  credited  to  the 
different  public  services  out  of  the  moneys  assigned  to 
them  in  the  books  of  the  Exchequer.  The  position  of  the 
various  public  services  can  be  learned  by  combining  this 
return  with  that  for  the  preceding  day,  and  with  the  sums 
demanded  and  transferred  from  the  Exchequer  for  such 
services.  The  assets  of  the  previous  day  are  increased  by 
the  latter.  They  form  the  balance  for  each  service  at  the 
beginning  of  the  day  for  which  the  rettu-n  is  now  presented. 
A  comparison  shows  by  how  much  this  has  decreased  in  the 

oSee  the  form  given  above,  pp.  230-1. 


251 


National      Monetary       Commission 

course  of  the  day.  The  sums  demanded  from  the  Excheq- 
uer for  the  different  serv^ices  are  merely  credited  to  the 
latter  by  a  book  transfer,  but  since  the  money  forms  a  fund 
from  which  demands  can  be  met  for  which  nothing  has 
been  transferred,  it  frequently  happens  that  the  different 
services  appear  in  the  return  as  "overdrawn."  This 
means  that  more  has  been  paid  on  their  behalf  than  was 
demanded.  It  follows  then  that  other  services  must  have 
used  less  than  the  amount  credited  to  them,  since  the  total 
of  all  the  amounts  credited  forms  the  whole  cash  balance 
standing  at  the  disposal  of  the  paymaster-general. 

The  bank  return  on  the  position  of  the  exchequer 
account  contains  on  the  debit  side  the  statement  of  the 
transfers  made  on  that  day  from  this  account  to  the  sup- 
ply account  of  the  paymaster- general.  These  transfers 
must  agree  with  the  demands  sent  in  by  the  paymaster- 
general  on  the  previous  day — i.  e.,  with  the  assignments 
made  by  the  Treasury  through  the  auditor- general.  Thus 
the  Treasury  checks  the  proper  execution  of  the  assign- 
ments. This  daily  bank  return  contains  however  no  in- 
formation on  the  state  of  the  supply  accounts,  since  the 
transfers  made  by  the  paymaster- general  to  his  working 
accomits  are  not  given  in  it.  But  the  weekly  return  of 
the  Bank  on  the  position  of  all  the  public  accounts,  does 
give  particulars  of  the  four  accounts  of  the  paymaster- 
general,  the  amount  of  which  must  agree  with  the  total 
amount  of  the  balances  of  the  different  services  as  stated 
by  the  paymaster- general  in  his  last  return. 

The  daily  return  of  the  paymaster  general  gives  no  par- 
ticulars of  the  votes,  but  is  arranged  under  the  general 
heads,  army,  navy,  civil  services,  etc.     But  each  month  he 


The     English     Banking     System 

forwards  a  specific  statement  to  the  Treasury.  The 
statement  of  the  position  of  the  four  accounts  at  the  Bank 
follows  a  combined  statement  of  the  balances  of  the  public 
services,  as  in  the  daily  return.  This  general  abstract  is 
the  only  return  made  for  the  army  and  nav}^  since  in 
these  cases  the  payment  of  the  money  is  not  classified 
under  the  different  heads.  The  expenditure  from  the 
civil  list  and  the  civil  services,  on  the  other  hand,  is  par- 
ticularized according  to  the  various  classes  and  parlia- 
mentary votes. 

The  Treasury  supervises  the  expenditure  made  through 
the  Mint  and  the  national  debt  commissioners  in  the  same 
way  as  that  of  the  paymaster- general,  and  keeps  a  check 
on  the  proper  crediting  of  the  money  transferred  to  the 
Bank  of  England. 

All  the  above-mentioned  returns  of  the  Bank  and  of  the 
receipt  and  issue  offices  supply  the  basis  for  the  public 
bookkeeping  managed  by  the  Treasury,  which  follows, 
step  by  step,  the  course  of  the  receipts  and  expenditures. 
All  the  returns  are  forwarded  to  the  auditor- general,  who 
has  however  no  right  of  intervention.  He  may  only  use 
them  as  a  basis  for  the  control  which  he  exercises  ah  ante 
on  the  issue  of  money  from  the  Exchequer,  and  for  his 
subsequent  control  of  details. 

II.  THE  BANK  AS  THE  OFFICE  FOR  THE  MANAGEMENT  OF  THE 

PUBLIC  DEBT. 

We  have  shown  that  the  position  held  by  the  Bank  of 
England  with  regard  to  the  management  of  the  public 
debt  has  remained  unaltered  in  essentials  since  1750-  At 
that  time  its  permanent  loans  to  the  Government  had 

253 


National      Monetary       Commission 

come  to  an  end  and,  with  the  exception  of  the  loan  raised 
in  1816  and  repaid  within  three  years  ,<»  the  Government 
has  not  made  use  of  the  Bank's  resom-ces  since  this  date. 
The  connection  between  the  Government  and  the  Bank 
developed  much  more  actively  with  respect  to  temporary 
loans,  for  which  application  was  regularly  made  to  the  Bank 
imtil  about  181 7  or  1819.  After  this  time  the  short  date 
loans  were  divided  into  those  raised  to  cover  a  cash  deficit, 
which  were  obtained  always  from  the  Bank  in  the  manner 
provided  by  law,  and  the  unfunded  debt  proper,  in  which 
the  Bank  might  share  when  specially  authorized  to  do  so 
by  Parliament.  The  acts  of  1866  and  1877  already 
referred  to,  which  transfer  to  the  Bank  the  management 
of  the  debts,  contain  a  clause  by  which  the  Bank  is  per- 
manently authorized  to  make  advances  to  the  Govern- 
ment on  treasur\'  bills  and  exchequer  bills  or  bonds,  issued 
with  the  consent  of  Parliament. 

The  relations  of  the  Bank  to  the  various  forms  of  public 
debt  are  then  as  follows :  Since  1 8 1 6  it  has  not  been 
employed  to  raise  a  permanent  funded  debt  out  of  its  own 
resources.  It  is  authorized  to  provide  loans  on  the  secur- 
ity of  government  bills  of  the  form  described.  It  hivari- 
ably  supplies  the  temporar}'  advances  required  to  equalize 
current  expenditure  with  current  receipts.  Finally  the 
entire  public  debt,  whether  it  has  a  share  .therein  or  not, 
is  entrusted  to  its  management. 

The  function  of  management  involves,  in  the  case  of  the 
unfunded  debt,  the  following  activities: 

On  the  order  of  the  Treasury  the  Bank  supplies  the 
required   number  of  treasury   bills,   and  exchequer  bills 

o  [This  loan  was  not  paid  off  till  1834. — H.  S.  F.] 
«54 


The     English     Banking     Syste 


m 


and  bonds,  made  out  for  the  amounts  demanded  by  the 
Treasury  and  marked  with  numbers  showing  the  order 
of  issue  of  the  bills,  and  sees  that  each  separate  paper  is 
signed  by  the  comptroller  and  auditor-general.  It  has 
then  to  hand  over  the  bills  so  prepared  to  the  persons 
appointed  by  the  Treasury  for  the  purpose,  and  to  transfer 
the  sums  they  represent  to  the  exchequer  account.  The 
payment  of  interest  on  the  cashing  of  a  bill  is  done  with- 
out a  special  order  from  the  Treasury  on  presentation  of 
the  interest  coupons  whose  payment  is  due,  or  of  bills  or 
bonds,  after  the  date  of  payment  has  been  announced  by 
the  Treasury  in  the  London  Gazette.  The  sums  needed 
for  this  are  transferred  by  the  Bank  from  the  exchequer 
account  at  the  same  time  as  the  money  required  for 
paying  the  interest  on  the  funded  debt. 

The  duties  of  the  Bank  as  manager  of  the  funded  debt 
are  tiresome,  though  very  simple  in  principle. '^  As  soon 
as  a  loan  has  been  subscribed  and  the  payments  have 
been  made,  the  chief  cashier  of  the  Bank  issues  a  scrip 
certificate  for  each  subscriber,  giving  his  name,  position, 
and  residence.  The  name  and  amount  given  on  this 
scrip  are  entered  in  a  journal  and  copied  from  this  into 
the  ledger,  which  is  arranged  in  alphabetical  order.  As 
soon  as  this  is  done  the  mere  scrip  certificate  becomes 
stock — i.  e.,  a  freely  transferable  share  in  the  public 
debt,  which  carries  with  it  certain  rights  (a  claim  to 
interest,  exemption  from  taxes,  etc.).  The  purchase  and 
sale   of   these   stocks   is  managed  through   stockbrokers; 

«These  duties  are  expressly  regulated  by  the  National  Debt  act,  33 
and  34  Vict.,  c.  71  (Aug.  9,  1870).  A  description  of  the  whole  procedure 
is  given  by  Thomas  Hankey,  "The  Principles  of  Banking,"  2d  ed.,  London, 
1873,  p.  78,  et  seq. 


255 


National      Monetary       Commission 

the  necessary  legal  transfers  of  the  shares  from  the  seller 
to  the  buyer  are  managed  by  the  Bank.  The  stockbroker 
sends  to  the  Bank  a  transfer  ticket,  stating  the  names  of 
the  buyer  and  seller  of  the  amount  to  be  transferred." 
This  is  checked  at  the  Bank  to  make  sure  that  the  seller 
holds  the  given  sum,  and  then  the  transfer  to  the  buyer 
is  entered  in  the  transfer  book.  A  duplicate  of  this  list 
can  be  seen  at  the  ofhce  of  the  National  Debt  Commission. 
A  stock  receipt  corresponding  to  this  entry  is  signed  by 
the  seller,  who  also  signs  the  entry  in  the  transfer  book, 
and  the  former  is  given  to  the  buyer.  By  the  signature 
to  the  stock  receipt  the  Bank  is  freed  from  liability  toward 
the  seller  for  the  value  disposed  of,  while  by  obtaining  the 
same  receipt  the  buyer  secures  a  claim  represented  by  the 
entry  in  the  ledger.  Such  transfers  may  be  either  of  the 
whole  value  entered  to  any  one  person,  or  of  any  portion, 
however  small,  of  this  value.  The  transfer,  like  all  the 
transactions  connected  with  the  stocks  (receipt  of  inter- 
est, repayment,  etc.),  can  be  made  by  power  of  attorney. 
Transfers  on  account  of  death,  or  as  presents,  etc.,  can 
be  made  without  the  help  of  stockbrokers.  There  is  a 
separate  office  for  the  registration  of  provisions  made  by 
will  and  arrangements  l^etween  living  persons,  where  the 
discharge  of  the  original  owner  and  the  transfer  to  the 
claimant  takes  place. 

The  Bank  shall  allow  any  holder  of  consols  to  have 
more  than  one,  but  at  most  four  accounts  in  the  same 
name,   but  each   account   must   be  distinguished   by   a 

Ö  These  transfer  tickets  are  kept,  so  that  in  case  the  ledgers  were  acci- 
dentally destroyed  they  could  be  re-compiled  by  means  of  the  tickets  and 
of  the  dividend  books,  which  are  also  preserved,  but  in  a  different  place. 


356 


The     English     Banking     System 

number  or  some  similar  designation.<^     Trustee  holdings 
are  excluded.^ 

The  name  "stock "  is  applied  both  to  the  separate  shares 
and  to  the  whole  loan,  in  so  far  as  it  carries  with  it  a  per- 
petual annuity.  The  stock  is  generally  added  to  one  of 
the  already  existing  stocks  bearing  the  same  rate  of  inter- 
est." The  stocks  now  existing  are:  Two  and  one-half  per 
cent  consols,  2 3^  per  cent  consols,  23^  per  cent  consols 
(16  Vict.),  terminable  annuities  for  life  and  terms  of 
year,  terminable  annuities  created  by  the  National 
Debt  Act,  1887,  and  the  Finance  Act  1899  (savings  bank 
annuities  and  book  debt  annuities),  sinking  fund  an- 
nuities. The  interest  falls  due  on  January  5  and  July  5. 
In  order  to  make  all  preparations  for  the  payment  of  the 
dividends  the  ledgers  of  the  national  debt  are  closed  for 
transfers  before  the  date  of  payment,  but  not  for  more 
than  37  days."^  Any  person  who,  on  the  day  of  closing, 
is  entered  in  the  books  as  a  holder  of  stock  is  entitled  to 
the  half  yearly  interest  falling  duc^  The  method  of  pay- 
ing the  dividends  is  as  follows:  "The  name  of  each  pro- 
prietor is  entered  on  a  '  slip,'  with  the  capital  stock  belong- 
ing to  him,  the  half  yearly  interest,  the  amount  to  be  de- 
ducted for  income  tax,  and  the  net  sum  payable  after  the 
said  duty  has  been  deducted.     These  slips     *     *     *     are 

«National  Debt  Act  (51  Vict.,  c.  2)  and  Stockholders'  Relief  Act  (55 
Vict.,  c.  39). 

0  Trustee  Act,  56  and  67  Vict.,  c.  53. 

<^  2)i  !md  34  Vict.,  c.  72,  I,  p.  3.  "Stock  means  the  several  capital  or 
joint  stocks  of  perpetual  annuities  *  *  *  and  includes  any  share  or 
interest  thereon  respectively." 

d  [Since  1861  stock  may  be  sold  and  transferred  any  day  in  the  year, 
holidays  excepted.     Hankey,  loc  cit.,  3d  ed.,  p.  91. — H.  S.  F.] 

e  Nat.  Debt  Act  (Stockholders'  Relief),  55  Vict.,  c.  39. 

68299° — II 17  257 


National     Monetary     Commission 

then  printed,  and  eventually  made  up  into  volumes  form- 
ing the  dividend  books."'*  The  total  stock  on  which 
dividend  is  to  be  paid  and  the  total  amount  of  the  latter 
can  be  found  by  adding  up  the  different  columns.  After 
the  entries  have  been  checked  the  dividend  warrants  are 
issued.  These  state  the  amount  of  stock  and  the  portion 
of  dividend  due  thereon.  They  also  are  printed,  bound 
up  together,  and  checked  by  the  entries  in  the  dividend 
books.  The  dividend  books  thus  prepared  are  taken  to 
the  dividend  room  where  the  claimants  of  dividends  or 
their  representatives  receive  the  dividend  warrants  on 
declaring  their  name  and  the  amount  of  stock  to  which 
they  lay  claim.  They  must  sign  the  dividend  book  and 
the  warrant,  their  signature  to  which  is  certified  by  one 
of  the  bank  clerks.  The  warrant  is  payable  at  once  in 
the  adjoining  dividend  pay  office,  or  may  be  used  as  a 
negotiable  instrument,  since  it  is  payable  to  bearer.** 

The  holders  of  stock  may  also  have  their  dividend  war- 
rants sent  by  post;  for  tliis  purpose  they  must  send  a 
signed  request  to  the  Bank,  giving  an  address  at  some 
place  in  the  United  Kingdom,  the  Channel  Islands,  or  the 
Isle  of  Man.  The  despatch  of  the  warrant  by  the  Bank, 
on  the  authority  of  such  instruction,  is  regarded  as  equiva- 
lent to  delivery',  as  is  also  a  transfer  to  another  bank. 

The  dividend  warrants,  as  they  are  paid  ofiF  from  time 
to  time  and  collected  at  the  Bank,  are  registered  in  a 
special  ofhce,  the  check  ofhce,  according  to  the  numbers 
they  bear.  Wlien  these  are  compared  with  the  warrants 
still  outstanding  in  the  dividend  rooms  the  result  gives 

o  Hankey,  3d  ed.,  p.  82. 

^  ^2  and  ii  Vict.,  c.  104;  a  and  34  Vict.,  c.  71,  p.  20  et  seq. 


«58 


The     English     Banking     System 

the  total  dividend  actually  paid,  still  unclaimed,  and 
drawn  but  not  presented  for  payment.  All  money  due 
as  dividends  which  is  not  claimed  within  ten  years  is 
transferred  to  the  account  of  the  national  debt  commis- 
sioners« as  well  as  the  stocks  on  which  it  is  due.  But 
claims  to  it  can  still  be  made  at  any  time.  The  unclaimed 
dividend  office  at  the  Bank  examines  such  claims  and 
is  the  only  office  at  the  Bank  whose  expenses  are  paid 
by  the  Government.*  At  the  demand  of  the  Treasury 
the  National  Debt  Commissioners  must  pay  into  the  ex- 
chequer from  the  account  of  unclaimed  dividends  such 
sums  as  may  be  desired  up  to  £1,000,000.  (4  Ed.  VII, 
c.  7.) 

The  number  of  public  debt  accounts  kept  by  the  Bank 
is  at  present  about  a  quarter  of  a  million,  but  it  naturally 
varies  with  the  consolidation  and  repayment  of  the  various 
stocks. 

These  variations  are  increased  to  no  small  extent  by  the 
possibility  of  procuring  negotiable  certificates  instead 
of  stock.^  It  is  provided  in  Part  V  of  33  and  34  Vict.,  c. 
71,  that  any  holder  of  stock  may  obtain  a  stock  certifi- 
cate— i.  e.,  a  certificate  of  his  claim  to  his  stock  or  to  a 
part  of  it — with  coupons  annexed  entitling  the  bearer 
to  the  dividends  on  the  stock  or  part  of  the  stock.  These 
certificates  are  issued  for  no  sum  less  than  £50  or  a  mul- 
tiple of  £50,  and  when  issued  are  not  made  out  to  order. 

«Since  56  Geo.  Ill  c.  60  (1816).  Unclaimed  interest  at  the  Bank  of 
England  was  first  claimed  as  public  property  in  1790.  In  the  case  of  the 
South  Sea  Company  this  was  not  done  until  1844  (Cf.  "Rep.  Publ.  Inc. 
and  Exp.,"  1869,  II,  p.  497). 

^  52  Vict.,  c.  6. 

c  Their  issue  was  first  allowed  by  26  Vict.,  c.  28. 


259 


National    Monetary     Commission 

Hence  they  entitle  the  bearer  to  the  stock  described  in 
the  certificate,  but  he  can  change  them  into  a  "nominal 
certificate"  at  any  time  by  inserting  a  name  in  the  pre- 
scribed place.**  These  certificates  can  be  changed  into 
stock  at  any  time.  Should  the  certificates  be  lost,  the 
Bank,  before  issuing  a  duplicate,  may  require  ei-idence  of 
ownership  and  of  the  loss  or  destruction,  the  advertise- 
ment of  the  loss  or  destruction  in  two  London  daily  papers, 
and  the  transfer  of  an  equivalent  sum  of  stock  or  the 
execution  of  a  bond  of  indemnity,  with  guarantees;  not 
more  than  a  year  must  have  passed  since  the  loss.  Six 
years  after  the  transfer  of  stock  or  the  execution  of  the 
indemnity  the  facts  must  be  advertised  again,  and  only 
after  this  can  the  stock  be  released  and  the  indemnity 
canceled.     (Stockhoklers'  Relief  Act,  53  \'ict.,  c.  39.) 

The  sum  paid  by  the  Govennnent  to  the  Bank  for  the 
expenses  connected  with  the  management  of  the  public 
debt  has  been  regulated  by  various  acts  of  Parliament 
during  the  nineteenth  century  and  has  been  fixed  at  a 
definite  rate  in  jiroportion  to  the  amount  of  the  debt. 
By  55  and  56  Vict.,  c.  48,  tlie  rate  was  fixed  as  follows: 
For  the  first  £500,000,000  a  yearly  sum  of  £325  is  paid; 
for  each  million  in  excess  of  the  amount,  £100  is  paid. 
By  24  Vict.,  c.  3,  it  was  ordered  that  annuities  for  terms  of 
years  should  be  reckoned  at  a  capital  sum  and  should  be 
"valued  at  Fifteen  Years  Purchase,  if  originally  granted 
for  a  Term  of  Fifty  Years  or  under."  The  yearly  sum  of 
£4,000  "Towards  the  Expenses  of  the  House,"  which  had 
been  paid  since  1694,  was  discontinued  as  was  also  the 


«  The  manner  of  issuing  the  certificates  is  regulated  by  the  Finance  Act 
of  190J.     (2  Ed.  VII,  c.  7,  s.  II.) 


a6o 


The     English     Banking     System 

additional  £1,579  paid  on  account  of  the  transfer  of 
South  Sea  debt.« 

For  the  administration  of  the  floating  debt  the  Bank  is 
paid  as  follows:  £100  per  million  of  exchequer  bills  and 
exchequer  bonds  and  £200  per  million  of  treasury  bills. ^ 

The  rate  of  payment  is  calculated  thus:  The  sum  out- 
standing on  the  last  day  of  the  financial  year,  according 
to  the  computations  of  the  Commissioners  of  the  National 
Debt,  forms  the  basis  for  reckoning  the  sum  to  be  paid 
to  the  Bank.^  In  the  case  of  treasury  bills  the  reckoning 
is  based  on  the  maximum  sum  which  has  been  outstand- 
ing at  any  period  of  the  past  financial  year,«^ 

Conclusion. 

By  a  process  of  gradual  evolution,  lasting  for  almost 
two   hundred    years,   England    has    arrived    at   a   point 
where   its   public   finances   are   inseparably    united   with 
those  of  the  Bank,  and  the  latter  has  taken  its  place  as  an 
indispensable  part  of  the  financial  organization.     At  an 
early  stage  in  this  process  it  was  demonstrated  that  a 
bank  could  be  more  usefully  turned  to  account  by  the 
State  than  in  raising  irredeemable  loans,  issuing  worth- 
ed The  sums  received  by  the  Bank  in  consequence  of  this  act  amounted 
to    £200,066   in    1862-63.     Two    years   previously,  in    i860,  the    Bank's 
expenses  of  management  were  £126,445,  so  that  assuming  them  to  be 
the  same  for  1862-63,  it  made  a  profit  of  £73,621.     But  since  the  Bank 
has  to  refund  all  the  losses  suffered  by  the  public  creditors  through  fraud, 
forgery,  etc.,  its  expenses  are  frequently  much  greater.     For  instance, 
in  1830  it  had  to  pay  £214,000  in  consequence  of  a  great  fraud.     The 
average  yearly  loss  on  this  account  was  £7,000  between  1808  and  1862. 
("Rep.  Publ.  Inc.  and  Exp.,"  1869,  II,  p.  581.) 
&  A  separate  payment  is  made  in  case  of  a  conversion, 
c  56  Vict.,  c.  48. 
d  6  Ed.  VII,  c.  10,  and  7  Ed.  VII,  c.  20. 


261 


I 


National     Monetary     Commission 

less  paper,  and  other  similar  financial  operations.  Some 
comitries  have  attempted  in  the  course  of  the  nine- 
teenth century  to  imitate  the  system,  indisputably  a 
good  one,  on  which  English  finances  are  managed.  Its 
advantages  for  the  Government  are  evident — a  decreased 
cash  balance,  a  simplified  system  of  office  organization,  a 
speedy  and  cheap  method  of  money  transfers,  etc.  But 
to  produce  these  advantages  it  is  essential  that  the  whole 
organization  of  the  public  money  and  not  merely  indi- 
vidual sums  should  be  transferred  to  the  Bank.  The 
Bank  must  be  used  as  the  institution  where  public  pay- 
ments are  actually  made,  not  merely  as  a  place  through 
which  money  passes  in  the  course  of  transfer  from  one 
public  treasury  to  another.  This  mistake  miderlies,  for 
example,  the  relations  of  the  German  Reichsbank  to  the 
German  Empire  and  the  Federal  States.  The  latter  are 
expressly  restricted  to  the  mere  drawing  of  orders  of 
transfer  on  the  Reichsbank,  and  the  position  of  the 
Imperial  Central  Treasury  as  a  section  of  the  Bank  serves 
only  to  conceal  the  fact  that  the  relation  of  the  Empire 
to  it  is  but  little  better.  The  Bank,  by  its  splendid  organ- 
ization and  its  branches,  would  be  specially  suited  to 
undertake  the  financial  business  of  the  Empire,  but  in 
actual  fact  the  payments  which  it  makes  on  behalf  of  the 
Imperial  Government  are  very  few,  and  it  is  chiefly 
employed  as  a  connecting  link  between  the  independent 
public  treasuries.  Hence  there  is  no  question  of  employ- 
ing the  cash  balance  in  Germany  to  the  extent  to  which 
this  is  done  in  England.  And  it  is  this  feature  which 
constitutes  the  special  merit  of  a  complete  union  between 
the  management  of  the  public  money  and  the  Bank,  as 


36a 


The     English     Banking     System 

this  is  exemplified  in  England.  By  the  transference  of 
the  management  of  public  money  to  the  Bank  of  Eng- 
land, the  whole  of  the  Government's  cash  balance,  in  so 
far  as  this  is  not  applied  directly  to  the  making  of  pay- 
ments, has  become  available  to  supply  credit  facilities  for 
the  community.  Moreover  the  cash  which  must  be  kept 
in  hand  for  payments  is  much  reduced,  owing  to  the 
technical  adjustment  of  the  methods  employed,  which 
have  come  to  resemble  exactly  the  forms  of  exchange  used 
in  private  transactions. 

It  is,  indeed,  remarkable  that  the  English  Government 
has  made  no  provision  for  employing  this  surplus  balance 
on  its  own  account,  but  has  resigned  it  entirely  to  the 
Bank.  With  the  exception  of  the  proposal,  to  which  we 
have  referred  elsewhere,  made  by  Burke  in  1 780,  and  which 
was  not  acted  upon  so  far  as  is  discoverable,  it  has  appar- 
ently never  been  suggested  that  the  State  should  reclaim 
the  profit  arising  out  of  the  cession  of  this  balance.  In 
this  respect  the  method  adopted  in  a  similar  case  by 
another  State,  Belgium,  shows  a  decided  advance. 
According  to  the  law  of  May  20,  1872,  and  the  agreement 
of  July  17,  1872,  the  National  Bank,  which  acts  as  state 
banker,  is  bound  to  employ  the  stuns  available  for  the 
benefit  of  the  State.  All  the  regulations  of  English 
financial  administration  pass  over  in  silence  the  very 
question  which  makes  the  entrance  of  the  Bank  into  the 
service  of  public  finance  an  important  economic  matter, 
viz,  in  what  manner  and  to  whose  profit  the  State  ought 
to  employ  its  surplus  balance.  The  advantages  which 
consequently  accrue  to  the  Bank  of  England  are  in  fact 
no  small  ones.     It  may,  however,  certainly  be  admitted 


263 


National    Monetary     Commission 

that  the  question  who  ought  to  obtain  the  advantage 
resuhing  from  the  apphcation  of  banking  methods,  is  a 
secondary'  consideration  as  compared  with  the  indubitable 
profit  which  is  obtained  in  any  case  by  the  trading  com- 
munity as  a  whole.  In  England  this  profit  is  of  an 
importance  not  to  be  despised,  even  taking  into  account 
the  magnitude  of  the  English  money  market.  Owing  to 
the  central  position  of  the  Bank  of  England  in  regard  to 
the  English  banking  system  the  public  revenue  is  treated 
in  the  same  way  as  the  surplus  cash  which  a  private 
individual  places  in  a  bank,  and  the  public  payments  pass 
through  the  same  channels  by  which  that  surplus  returns 
to  its  source.  The  importance  of  this  union  of  private 
and  public  methods  of  payment  can  not  be  given  in 
figures,  for  statistical  data  are  lacking  from  which  the 
saving  in  cash  transactions  could  be  reckoned;  but  we 
can  obtain  an  idea  of  it  by  examining  the  'process  of 
public  payments  in  general. 

The  revenue  is  collected  by  the  collectors.  They 
receive  it  for  the  most  part  not  in  cash,  but  in  cheques.« 
They  present  these  cheques  to  a  bank  and  obtain  instead 
a  bill  of  exchange  which  is  forwarded  to  the  Commis- 
sioners for  the  collection  and  management  of  the  inland 
revenue  in  London.  The  Commissioners  send  the  bill 
to  the  Bank,  where  it  is  taken  up.  The  Bank  does 
not,  however,  as  a  rule,  receive  coin  for  the  separate 
bills,  since  the  transaction  is  usually  with  a  bank  be- 
longing to  the  clearing  house,  and  thus  a  process  of 
"compensation"  takes  place  in  the  well-known  manner. 

o  All  the  demand  notes  for  payment  used  by  the  collectors  state  the 
name  of  the  Bank  in  favor  of  which  cheques  should  be  crossed. 


a64 


The     English     Banking     System 

The  sum  with  which  the  bank  is  credited  by  the  per- 
son upon  whom  the  bill  is  drawn  is  at  once  placed  by 
it  to  the  credit  of  the  accoimt  of  the  revenue  depart- 
ment. The  latter  transfers  it  to  the  exchequer  account. 
In  this  way  the  great  reservoir  of  the  revenue  is  filled. 
From  thence  the  sums  needed  for  the  public  services 
are  transferred  to  the  account  of  the  paymaster- 
general.  This  is  all  accomplished  without  employing  a 
single  coin.  The  process  of  issue  now  begins.  Bills  of 
exchange  on  the  Government  are  presented.  They  are 
made  payable  at  the  Bank.  Whether  the  claimant 
receives  coin  or  not  makes  no  difference  as  far  as  the 
administration  of  the  public  finances  is  concerned.  In 
any  case  the  sum  will  be  debited  to  the  bill  accoimt. 
Probably,  however,  the  person  presenting  the  bill  is  some 
great  banker  who  has  business  relations  with  the  Bank 
of  England.  In  most  cases  a  process  of  compensation 
will  be  possible.  On  another  occasion  the  paymaster- 
general  may  give  cheques  to  the  claimants.  These 
cheques  are  crossed  and  will  be  sent  by  the  possessors  to 
their  bankers  who  will  credit  them  with  the  values  thereof. 
Perhaps  at  the  same  time  the  possessor  draws  a  cheque  on 
these  same  assets,  in  order  to  pay  a  tax  which  has  fallen 
due  in  the  meanwhile,  and  the  circular  process  begins 
anew.  The  bankers  themselves,  if  they  are  comitry 
bankers  with  only  a  small  business,  have  relations  with 
the  large  banks.  The  cheques  issued  by  the  paymaster- 
general  are  deposited  with  these  latter  like  all  the  others, 
i.  e.,  they  are  transmitted  to  be  placed  to  the  credit  of 
the  possessor.  But  the  great  bankers  take  part  as  before 
in  the  process  of  compensation,  in  the  center  of  which  is 


26s 


National     Monetary     Commission 

the  Bank  of  England.  In  yet  a  third  case  the  amount  is 
transferred  from  the  Exchequer  account  to  that  of  the 
commissioners  of  loans  for  pubhc  works.  This  constitutes 
a  loan  to  a  company.  If  the  latter  has  its  headquarters 
in  London  it  will  also  have  a  banker  there;  if  in  the 
provinces,  an  account  will  be  opened  for  it  at  some 
country  bank.  The  Bank  of  England  will  again  transfer 
the  amount  in  question  to  this  bank  by  the  method  usual 
between  bankers.  When  the  Bank  has  to  pay  the 
interest  on  the  national  debt,  the  money  is  assigned  to  it 
by  means  of  a  book  transfer.  The  payments  made  in 
coin  by  the  Bank  itself  amount  to  but  little.  In  by  far 
the  greater  number  of  cases  it  need  merely  transfer  the 
sums  to  the  accounts  of  the  bankers. 

Two  advantages  are  inherent  in  the  system  of  having 
the  public  money  managed  by  the  Bank  of  England: 
Clearness  and  the  avoidance  of  cash  payments.  The  con- 
centration of  all  transactions  in  the  exchequer  account 
allows  not  only  the  Goveniment  and  the  bank,  but,  by 
means  of  the  weekly  return,  the  public,  to  know  the  actual 
condition  of  the  public  assets.  The  fluctuations  in  the 
account  afford  a  sure  guide  to  the  times  of  inflow  and  out- 
flow of  money,  and  both  the  bank  and  the  op)en  money 
market  can  confidently  base  their  operations  upon  the 
experiences  of  previous  years. 

The  avoidance  of  cash  payments  is  of  primary-  impor- 
tance in  a  country  like  England,  where  payment  by  check 
has  been  so  widely  adopted  and  where  the  extensive  oper- 
ations of  the  money  market  rest  upon  a  small  reserve  in 
the  bank  of  issue.  Although  the  monetary  transactions  of 
the  Government  do  not  constitute  a  large  proportion  of 


•66 


The     English     Banking     Syste 


m 


the  total  English  transactions,  yet  the  withdrawal  of  even 
this  small  part  of  the  total  operations  of  the  market  would 
be  intensely  felt.  The  serious  disturbances  which  have 
been  repeatedly  caused  in  the  United  States  by  the  inde- 
pendent position  of  the  Treasury  show  with  sufficient 
clearness  the  important  economic  effects  of  a  separation 
between  the  Government  transactions  and  the  money 
market  under  a  system  where  check  payments  prevail. 
The  safety  of  check  payments  demands  a  universal  money 
market.  Where  private  transactions  are  still  largely  car- 
ried out  in  gold  or  notes,  the  partial  adoption  of  a  cash 
system  by  the  State  is  much  less  felt  than  under  a  system 
of  deposit  banking. 

The  Bank  of  England  manages  the  public  deposits  in  the 
same  way  as  the  other  deposits  intrusted  to  it:  60  to  70 
per  cent  are  lent  out  at  bank  rate,  the  rest  is  kept  unem- 
ployed at  the  bank.  The  retention  of  even  this  proportion 
as  a  reserve  is  regarded  by  the  market  as  the  withdrawal 
of  so  much  wealth  and  is  resented;  and  during  the  last 
decade  frequent  complaints  have  been  made  of  the 
method  of  administering  the  public  deposits  on  two 
grounds,  that  of  the  importance  of  the  unemployed 
reserve  and  that  of  the  high  rate  charged  for  loans.  The 
practice  of  the  English  bank  of  issue  deprives  the  market 
of  about  a  third  of  the  deposits  intrusted  to  it.  This  policy 
is  felt  much  less  in  the  case  of  the  other  deposits — which 
consist  partly  of  deposits  for  other  banks,  cash  balances, 
and  assets  temporarily  not  available,  such  as  those  of  the 
Colonial  Governments,  and  partly  of  fairly  constant  private 
deposits — than  in  the  case  of  the  public  deposits,  which 
are  almost  entirely  withdrawn  from  the  market  to  the 


267 


National     Monetary     Commission 

bank  during  the  first  two  months  of  the  year.  The 
continuance  of  the  autumn  "clear  money"  over  the  end 
of  the  year  and  on  to  March  is,  not  without  justice, 
attributed  to  the  accumulation  at  the  bank  during  this 
period  of  the  money  collected  in  taxes.  The  retention  of 
about  a  third  of  the  money  deposited  seems,  at  any  rate, 
to  indicate  too  strict  a  business  policy,  and  the  demand  that 
the  public  deposits  should  be  more  freely  placed  at  the 
disposal  of  the  market  appears  not  without  justification. 

The  high  loan  rate  at  which  the  bank  advances  money 
is  also  frequently  the  subject  of  severe  criticism.  The 
public  money,  so  it  is  often  argued  on  the  open  market,  is 
placed  at  the  disposal  of  the  bank  without  any  counter 
payment  on  its  part,  and  although  the  expenses  connected 
with  the  management  of  the  public  money  are  not  incon- 
siderable, yet  the  Bank  of  England,  by  its  connection  with 
the  State,  secures  freely  the  largest  deposit  account  con- 
trolled by  any  English  bank,  without  having  to  undergo 
any  expenses  in  earning  it;  hence  there  is  no  justification 
for  making  the  bank  rate  essentially  higher  on  the  average 
than  the  market  rate. 

The  Continental  Governments  which  have  intrusted  the 
management  of  their  money  to  their  banks  of  issue,  have 
in  some  cases — Belgium — made  regulations  as  to  the  dis- 
posal of  the  money  deposited;  in  other  cases — e.  g.,  Bel- 
gium, Italy,  and  the  Netherlands — reserved  for  them- 
selves counter  advantages.  In  England  the  Govern- 
ment has  left  the  disposal  of  the  surplus  balance  entirely 
in  the  hands  of  the  bank,  and  except  for  the  proposal 
referred  to  elsewhere,  made  by  Burke  in  1780, 
no  suggestion  can  be  discovered  to  claim  any  profit  for 


368 


I 


The     English     Banking     System 

the  State  from  the  balances  thus  intrusted.  An  EngHsh 
financial  authority  has,  on  the  other  hand,  pronounced 
before  the  American  Commission  on  Banking,  in  favor  of 
the  investment  of  a  portion  of  the  deposits  in  bills,  accord- 
ing to  the  Belgian  plan,i  but  to  this  the  prevailing  opinion 
in  the  city  objects  on  the  ground  that  foreign  bills  are  not 
always  a  perfect  security  for  obtaining  gold.  The  fact 
that  no  interest  is  paid  on  public  deposits  corresponds 
with  the  custom  of  London  banking,  according  to  which 
no  interest  is  allowed  on  current  accoimts.  The  high  rate 
of  interest  charged  for  loans  is  due,  apart  from  purely 
monetary  considerations,  to  the  position  of  the  bank; 
interest  has  to  be  provided  on  a  heavy  capitalization, 
there  is  no  reserve  capital,  and  the  privilege  of  note  issue 
has  for  a  long  time  brought  no  advantage  to  the  bank,  but 
on  the  contrary  has  hindered  it  appreciably  in  its  regular 
business. 

The  policy  of  centralizing  the  Government  assets  in 
London  has  contributed  to  an  important  extent  toward 
the  concentration  of  the  transactions  on  the  money 
market.  In  spite  of  the  great  wealth  of  provincial  Eng- 
land, for  more  than  a  century  no  place  except  London  has 
been  able  to  produce  a  money  market,  and  the  ruling 
position  of  the  capital  in  the  matter  of  short  date  credit 
transactions  has  contributed  greatly  to  the  amalgamation 
of  the  country  banks  with  London  estabHshments  and  has 
considerably  strengthened  the  tendency  to  a  centraUzed 
system  of  deposit  banking,  which  is  an  essential  feature  of 
English  economic  organization.     The  desire  to  secure  the 

*The  English  Banking  System,  National  Monetary  Commission,  6i 
Cong.,  2dsess.,  Washington,  1910. 


269 


National    Monetary     Commission 

greatest  possible  fluidity  of  capital  has  led  the  Bank  of 
England  to  favor  loans  on  stock  securities  and  the  dis- 
count of  short  date  bills,  and  thus  to  Hmit  its  loan  trans- 
actions with  regard  to  speculation  in  stocks  and  to  genuine 
trading  credit.  This  procedure  arises,  however,  merely 
from  the  general  business  policy  of  the  English  bank  of 
issue  and  is  not  directly  connected  with  the  management 
of  the  public  money;  the  concentration  of  money  at  the 
bank  would  not  necessarily  postulate  any  local  concentra- 
tion of  its  capital. 

According  to  Bargehot 's  opinion  the  English  chancellor 
of  the  exchequer  "created"  the  money  market  by  his 
deposits;  the  management  of  public  money  was  bound  up 
with  the  banking  system  before  check  transactions  super- 
seded note  payments.  On  the  Continent  the  order  of 
development  was  reversed;  here  the  gradual  transfer  of 
the  management  of  the  money  of  private  individuals  to 
the  banks  created  the  money  market  and  developed  it  to 
a  point  at  which  the  complete  transference  of  the  Govern- 
ment operations  is  demanded,  not  only  in  order  to  save 
cash  payments,  but  also  to  promote  the  security  of  the 
money  market. 


370 


APPENDIX  I. 


P      The  Statutory  Basis  of  the  Position  of  the  Bank  of  Eng- 
land IN  THE  English  Economic  System. 

(i)  the  act  establishing  the  bank. 

[S  and  6  Will,  and  Mary,  c.  so.] 

"An  act  for  granting  to  their  Majesties  several  Ratesand 
Duties  upon  Tonnage  on  ships  and  vessels  and  upon  beere  ale  and 
other  liquors  for  securing  certain  recompences  and  advantages 
in  the  said  act  mentioned  to  such  persons  as  shall  voluntarily 
advance  the  sum  of  fifteen  thousand  pounds  towards  carrying 
on  the  war  against  f ranee." 

Sections  I  to  XVII  inclusive,  with  the  customary  prolixity  of 
old  English  statutes,  contain  provisions  relating  to  the  duties 
imposed;  their  amount,  methods  of  collection,  duration,  etc. 
Sections  XXXIII  to  XLVII  (the  last)  provide  for  the  applica- 
tion of  the  money  paid  in  to  the  purposes  set  forth  in  the  act, 
contain  general  administrative  enactments  with  regard  to  cer- 
tain branches  of  the  revenue  and  finally  make  provision  for  the 
raising  of  a  life  annuity  in  case  the  form  of  loan  which  is  described 
in  further  detail  in  Sections  XVIII  to  XXXII  should  not  prove 
successful.  The  latter  sections  alone  affect  the  Bank  of  England, 
and  we  reproduce  them  here,  with  all  their  wearisome  repeti- 
tions, in  order  to  give  a  complete  account  of  the  legal  position  of 
the  Bank  at  its  foundation. 

"  s.  XIX.  And  be  it  further  enacted  by  the  authority  aforesaid, 
That  it  shall  and  may  be  lawfull  to  and  for  their  Majesties  by 
commission  under  the  "Create  Scale  of  England  to  authorize 
and  appointe  any  number  of  persons  to  take  and  receive  all  such 
voluntarily  subscriptions  as  shall  be  made  on  or  before  the  first 
day  of  August  which  shall  be  in  the  yeare  of  our  Lord  One  thou- 


271 


National     Monetary     Commission 

sand  six  hundred  ninety  four  by  any  person  or  persons  Natives 
or  Foreigners  Bodies  Politicke  or  Corporate  for  and  towards 
the  raiseing  and  paying  into  the  Receipte  of  Exchequer  the  said 
surae  of  Twelve  hundred  thousand  pounds  and  that  the  yearely 
sume  of  one  hundred  thousand  pounds  parte  of  the  said  yearely 
sume  of  one  hundred  and  forty  thousand  pounds  ariseing  by  and 
out  of  the  said  Duties  and  Impositions  before  mentioned  shall 
be  applied  issued  and  directed  and  is  hereby  appropriated  to  the 
use  and  advantage  of  such  person  and  persons  Bodies  Politicke 
and  Corporate  as  shall  make  such  voluntarily  subscriptions  and 
payments  their  Heires  Successors  or  Assignes  in  the  propor- 
tion hereafter  mentioned     .... 

"XX.  And  he  it  further  enacttd,  That  it  shall  and  may  be 
lawful!  to  and  for  their  Majesties  by  Letters  Patents  under  the 
Create  Scale  of  England  to  limitt  directe  and  appointe  how  and 
in  what  manner  and  proportions  and  under  what  rules  and  direc- 
tions the  said  sume  of  Twelve  hundred  thousand  pounds  .  .  . 
and  the  said  yearely  sume  of  one  Imndred  thousand  pounds  .  .  . 
and  every  or  any  parte  or  proportion  thereof  may  be  assigneable 
or  transferable  assigned  or  transferred  to  such  person  or  persons 
onlv  as  shall  freely  and  voluntarily  accepte  of  the  same  and  not 
otherwise  and  to  incorporate  all  and  every  such  Subscribers 
and  Contributors  their  Heires  Successors  or  Assigns  to  be  one 
Body  Corporate  and  Politick  by  llie  name  of  the  Governor  and 
Company  of  the  Banke  of  Ivngland  and  by  the  same  name  of  the 
Governor  and  Company  of  the  Banke  of  England  to  have  per- 
petuall  succession  and  a  Common  Scale  and  that  they  and  theire 
Successors  by  the  name  aforesaid  shall  be  able  and  capable  in 
Lawe  to  have  purchase  receive  possesse  enjoye  and  retaine  to 
them  and  their  vSuccessors  Lands  Rents  Tenements  and  Heredi- 
taments of  what  kind  nature  or  quality  soever.  And  alsoe  to 
sell  grant  demise  alien  or  dispose  of  the  same.  And  by  the  same 
name  to  sue  and  implead  and  be  sued  and  implead  answere  and 
be  answered  in  Courts  of  Record  or  any  other  place  whatso- 
ever and  to  doe  and  execute  all  and  singular  other  matters  and 
things  by  the  name  aforesaid,  that  to  them  shall  or  may 
appertain  to  do,  subjectc  neverthelesse  to  the  proviso  and 
condition  of  Redemption  herein  after  mentioned. 


The    English     Banking    System 

"XXI.  Provided  alwaies  and  it  is  hereby  enacted,  That  in 
case  the  whole  sume  of  Twelve  hundred  thousand  pounds  .  .  . 
shall  not  be  advanced  and  paid  into  the  Receipte  of  Exchequer 
before  the  First  day  of  January  which  shall  be  in  the  yeare  of 
our  Lord  One  thousand  six  hundred  and  ninety  four  that  then 
the  Subscribers  and  Contributors  shall  only  have  and  receive 
so  much  and  such  parte  and  proportion  to  the  said  sume  or 
sumes  soe  respectively  paid  and  advanced  as  shall  be  after  the 
rate  of  eight  pounds  per  Centum  per  Annum.  And  that  at 
any  Time  upon  twelve  months  notice  after  the  first  day  of 
August  which  shall  be  in  the  yeare  of  our  Lord  One  thousand 
seven  hundred  and  five  upon  repayment  by  Parliament  of  the 
said  Sume  of  twelve  hundred  thousand  pounds  ...  or  such 
parte  thereof  as  shall  be  paid  or  advanced  as  aforesaid  under 
the  respective  Subscribers  and  Contributors  .  .  .  and  of  all 
the  arrears  of  the  said  yearely  payments  of  One  hundred  thou- 
sand pounds  ...  or  such  proportionable  parte  thereof 
according  to  the  sume,  which  shall  be  paid  and  advanced  as 
aforesaid  then  and  from  thenceforward  the  said  yearely  pay- 
ments and  every  of  them  .  .  .  and  the  said  Corporation 
shall  absolutely  cease  and  determine  any  thing  herein  contained 
in  any  wise  to  the  contrary  notwithstanding." 

XXII  provides  that  the  Treasury  shall  regulate  the  payment 
of  the  yearly  income  without  further  royal  warrant  and  that 
the  officers  of  the  Exchequer  shall  issue  it  without  fees. 

"XXIII.  Provided  alwaies  and  be  it  further  enacted  by  the 
authority  aforesaid,  That  noe  person  or  persons  Boddyes  Poli- 
ticke  or  Corporate  shall  by  themselves  or  any  other  person  or 
persons  in  trust  for  him  or  them  subscribe  or  cause  to  be  sub- 
scribed for  and  towards  the  raiseing  and  paying  the  said  sume  of 
twelve  hundred  thousand  pounds  any  sume  or  sumes  of  money 
exceeding  the  sume  of  twenty  thousand  pounds  and  that  every 
such  Subscribers  shall  at  the  time  of  such  subscription  pay  or 
cause  to  be  paid  unto  the  Commissioners  who  shall  be  author- 
ized and  appointed  for  takeing  and  receiving  subscriptions  as 
aforesaid  one  full  fourth  parte  of  his  or  their  respective  sub- 
scriptions and  in  defaulte  of  such  payments  as  aforesaid  every 
such  subscription  shall  be  utterly  void  and  null.  And  that  the 
residue  of  the  said  subscriptions  shall  be  paid  into  the  Receipte 

68299°— II 18  273 


National     Monetary     Commission 

of  theire  Majesties  Exchequer  as  theire  Majesties  shall  directe 
before  the  said  first  day  of  January  next.  And  in  defaulte  of 
such  payments  that  then  the  forth  parte  first  paid  as  aforesaid 
shall  be  forfeited  to  and  for  the  benefit  of  theire  Majesties  theire 
Heires  and  Successors. 

"XXIV.  Provided  alsoe  and  he  it  enacted.  That  it  shall  not  be 
law-full  to  or  for  any  person  or  persons,  Natives  and  Foreigners, 
Bodyes  Corporate  or  PoUticke  at  any  time  or  times  before  the 
first  day  of  July  next  ensueing  to  subscribe  in  his  her  or  theire 
owne  name  or  names  or  in  any  other  name  or  names  in  trust  for 
him  her  or  them  for  or  towards  the  raiseing  and  paying  into  the 
Receipte  of  the  Exchequer  the  said  sume  of  Twelve  hundred 
thousand  pounds  .  .  .  any  sume  or  sumes  exceeding  in  the 
whole  the  sume  of  Tenne  thousand  pounds;  anything  in  this 
Act  conteined  to  the  contrary  in  any  wise  notwithstanding. 

"XXV.  Provided  aluaies  and  be  il  declared  and  enacted  to  be 
the  true  intent  and  meaneing  of  this  Act,  That  in  case  the  whole 
sume  of  Twelve  hundred  thousand  pounds  or  a  moiety  thereof 
be  not  subscribed  on  or  before  the  First  day  of  August  One 
thousand  six  hundred  ninety  four  as  aforesaid,  that  then  the 
powers  and  authorities  in  this  Act  for  erecting  a  Corporation  as 
aforesaid  shall  cease  and  determine  anything  herein  conteined 
to  the  contrary  notwithstanding.  And  in  such  case  soe  much 
of  the  said  yearcly  sume  of  One  hundred  thousand  pounds  as 
shall  belong  to  the  said  Subscribers  according  to  the  meaneing  of 
this  Act  shall  be  transferrable  and  may  be  from  time  to  time 
transferred  by  the  respective  persons,  soe  subscribing,  advanc- 
ing, and  paying  any  parte  of  the  said  Twelve  hundred  thousand 
pounds  into  the  Exchequer  or  their  respective  Heires,  Succes- 
sors or  Assignes  to  any  person  or  persons  whatsoever  by  any 
writeing  or  writeings  under  the  hand  and  scale  of  the  person  or 
persons  transferring  the  same  attested  by  two  or  more  credible 
Witnesses  and  entered  within  Twenty  dayes  after  the  sealeing 
thereof  in  a  Booke  or  Bookes  to  be  for  that  purpose  kept  in  the 
said  Exchequer  by  theire  Majesties  Remembrancer  for  the  time 
being  (for  the  entering  whereof  nothing  shall  be  paid)  which 
entries  the  said  Remembrancer  is  from  time  to  time  upon 
request  directed  to  make;  and  such  parte  of  the  said  ycarely 
sume  of  One  hundred  thousand  pounds  as  shall  by  this  Act  be 

274 


The     English     Banking     S  y  s  t  e 


m 


due  to  the  said  subscribers,  shall  not  att  any  time  or  times 
hereafter  be  made  use  of  or  be  a  fund  or  security  for  or  lyable 
or  applyed  to  raise  pay  or  secure  any  more  further  or  other 
sume  or  sumes  of  money  whatsoever  save  only  such  money  as 
shall  in  pursuance  of  and  according  to  the  intent  of  this  Act  be 
advanced  and  paid  into  their  Majesties  Exchequer  within  the 
time  by  this  Act  limited  for  the  same. 

"XXVI.  And  it  is  hereby  enacted  by  the  authority  afore- 
said, That  the  said  Corporation  so  to  be  made  shall  not 
borrow  or  give  security  by  Bill,  Bond,  Covenant  or  Agreement 
under  their  Common  Scale  for  any  more  further  or  other  sum 
or  sumes  of  money  exceeding  in  the  whole  the  sume  of  Twelve 
hundred  thousand  pounds,  so  that  they  shall  not  owe  at  any 
one  time  more  then  the  said  sume  unless  it  be  by  Act  of  Parlia- 
ment upon  funds  agreed  in  Parliament,  and  in  such  case  only 
such  further  sumes  as  shall  be  soe  directed  and  allowed  to  be 
borrowed  by  Parliament  and  for  such  time  only  until  they  shall 
be  repaid  such  further  sumes  as  they  shall  borrowe  by  such 
authority  and  if  any  more  or  further  or  other  sumes  of  money 
shall  be  borrowed  taken  up  lent  or  advanced  under  theire 
Common  Scale  or  for  payment  of  which  any  Bond  Bill,  Cove- 
nant or  Agreement  or  other  Writeing  shall  be  made  sealed  or 
given  under  the  Common  Scale  of  the  said  Corporation  soe  to  be 
made  then  and  in  such  case  all  and  every  person  or  persons  who 
shall  be  a  member  or  members  of  the  said  Corporation,  his  and 
theire  respective  private  and  personall  capacities  be  chargeable 
with  and  lyable  in  proportion  to  theire  severall  Shares  and 
Subscriptions  to  the  repayment  of  such  moneys,  which  shall  be 
soe  borrowed  taken  up  or  lent  with  Interest  for  the  same  in  such 
manner  as  if  such  Security  had  been  a  Security  for  payment  of 
soe  much  money  and  Interest  for  the  same  sealed  by  such 
respective  member  or  members  of  the  said  Corporation  and  deliv- 
ered by  him  or  them  as  theire  respective  Acts  and  Deedes  in 
proportion  to  theire  severall  Shares  or  Subscriptions  as  afore- 
said and  that  in  every  such  case  an  Action  of  Debt  shall  and 
may  be  brought  commenced  prosecuted  and  mainetained  in 
any  of  their  Majesties  Courts  of  Record  att  Westminster  by  the 
respective  Creditor  or  Creditors,  to  whom  any  such  security 


275 


National     Monetary     Commission 

under  the  Common  Seale  of  the  said  Coq^oration  shall  be  made 
or  his  or  theire  respective  Executors  or  Administrators  in  pro- 
portion to  theire  respective  Shares  or  Subscriptions  as  afore- 
said and  therein  recover  and  have  judgement  for  him  or  them 
in  such  and  the  like  manner  as  if  such  security  were  respectively 
sealed  by  the  respective  person  or  persons,  who  shall  be  soe 
sued  or  his  or  theire  respective  Ancestor  or  Testator  or  Intes- 
tate and  by  his  and  them  executed  and  delivered  as  his  or  theire 
respective  Acts  and  Deedcs  any  condition  covenant  or  agree- 
ment to  be  made  to  the  contrary  thereof  in  any  wise  notwith- 
standing. And  if  any  condition  covenant  or  agreement  shall 
be  made  to  the  contrary,  the  same  shall  be  and  is  hereby  de- 
clared to  be  void  any  thing  herein  contained  or  any  Lawe  or 
Usage  to  the  contrary  notwithstanding  and  in  such  Action  or 
Actions  soe  to  be  brought  not-  Privilege  l^rotcction  Essoign  or 
Wager  of  Lawe  nor  any  more  then  one  Imparlance  shall  be 
allowed. 

"XXX'II.  And  to  the  intent  that  theire  Majesties  Subjects 
may  not  be  oppressed  by  the  said  Corporation  by  theire  monopo- 
lising or  ingrosseing  any  sort  of  Goods,  Wares  or  Merchan- 
dizes, Be  it  further  declared  and  Enacted  by  the  authority 
aforesaid,  that  the  said  Corporation  to  be  made  and  created  by 
this  Act,  shall  not  att  any  time  dureing  the  continuance  thereof 
deule  or  trade  or  permitt  or  suffer  any  person  or  persons  what- 
soever either  in  trust  or  for  the  benefitt  of  the  same  to  deale  or 
trade  with  any  of  the  Stock  moneyes  or  I^ffects  of  or  in  any  wise 
belonging  to  the  said  Corporation  in  the  buying  or  selling  of 
any  Goods,  Wares  or  Merchandizes  whatsoever  and  every 
person  or  persons  who  shall  soe  deale  or  trade  or  by  whose 
orders  or  directions  such  Dealeings  or  Tradeing  shall  be  made 
prosecuted  or  managed,  shall  forfeite  for  every  such  Dealeing 
or  Tradeing  and  every  such  order  and  directions  treble  the 
valy  of  the  Goods  and  Merchandize  soe  traded  for  to  such 
person  or  persons  who  shall  sue  for  the  same  by  Action  of  Debt, 
Bill,  Plaint  or  information  in  any  of  theire  Majesties  Courts  of 
Record  at  Westminster  wherein  noe  Essoigne,  Protection  nor 
other  Privilege  whatsoever  nor  any  Injunction  Order  of  rcstrainte 
nor  Wager  of  Lawe  shall  be  allowed  nor  any  more  than  one 
Imparlance. 

276 


The     English     Banking     Syste 


m 


"XXVIII.  Provided  that  nothing  therein  contained  shall 
any  wayes  be  construed  to  hinder  the  said  corporation  from 
dealing  in  bills  of  Exchange  or  in  buying  or  Selling  BuUion, 
Gold  and  Silver  or  in  selling  any  goods,  wares  or  merchandize 
whatsoever,  which  shall  really  and  bona  fide  be  left  or  deposited 
with  the  said  corporation  for  money  lent  and  advanced  thereon 
and  which  shall  not  be  redeemed  at  the  time  agreed  on  or 
within  three  months  after  or  from  selling  such  goods  as  shall  or 
may  be  the  produce  of  lands  purchased  by  the  said  Corporation. 

"XXVIX.  Promded  alwayes  and  he  it  enacted  by  the  authority 
aforesaid,  That  all  and  every  Bill  or  Bills  obligatory  and  of  creditt 
under  the  Scale  of  the  said  Corporation  made  or  given  to  any 
person  or  persons  shall  and  may  by  Indorsement  thereon  under 
the  hand  of  such  person  or  persons  be  assigneable  and  assigned 
to  any  person  or  persons  who  shall  voluntarily  accepte  the  same 
and  soe  by  such  Assignee  toties  quoties  by  indorsement  there- 
upon and  that  such  Assignment  and  Assignements  soe  to  be 
made,  shall  absolutely  vest  and  transferre  the  Right  and  Prop- 
erty in  and  unto  such  Bill  or  Bills  Obligatory  and  of  Creditt  and 
the  moneys  due  upon  the  same  and  that  the  Assignee  or  Assignees 
shall  and  may  sue  for  and  maintaine  an  action  thereupon  in  his 
owne  name. 

"XXX.  Provided  alwaies  and  it  is  hereby  further  enacted,  That 
if  the  Governor,  Deputy  Governor,  the  Director,  Managers,  Assist- 
ants or  other  Members  of  the  said  Corporation  so  to  be  estab- 
lished shall  upon  the  account  of  the  said  Corporation  at  any  time 
or  times  purchase  any  lands  or  revenues  belonging  to  the  Crowne 
or  advance  or  lend  to  their  Majesties,  theire  Heires  or  Successors 
any  sume  or  sumes  of  money  by  way  of  Loan  or  Anticipation  on 
any  parte  or  parts,  branch  or  branches,  fond  or  fonds  of  the 
Revenues  now  granted  or  belonging  or  hereafter  to  be  granted 
or  belonging  to  their  Majesties,  their  Heires  or  Successors  other 
than  such  fond  or  fonds,  branch  or  branches  of  the  said  Revenues 
only  on  which  a  credit  of  loan  is  or  shall  be  granted  by  Parlia- 
ment that  than  the  said  Governor,  Deputy  Governor,  Directors, 
Managers,  Assistants  or  other  Members  of  the  said  Corporation 
who  shall  consent  agree  to  or  approve  of  the  advanceing  or  lend- 
ing to  theire  Majesties,  theire  Heires  or  Successors  such  sume  or 


277 


National     Monetary     Commission 

sumes  of  money  as  aforesaid  such  and  each  and  every  of  them 
soe  agreeing  consenting  approving  and  being  thereof  lawfully 
convicted,  shall  for  every  such  ofifence  forfeite  treble  the  value 
of  every  such  sume  or  sumes  of  money  soe  lent  whereof  one  fifth 
parte  shall  be  to  the  informer  to  be  recovered  in  any  of  their 
Majesties  Courts  of  Record  at  Westminster  by  action  of  Debt 
Bill  Plainte  or  Information  wherein  no  Protection  Wager  of 
Lawe,  Essoign,  Privilege  of  Parliament  or  other  Privilege  shall 
be  allowed,  nor  any  more  than  one  Imparlance  and  the  residue 
to  be  disposed  of  towards  publicke  uses  as  shall  be  directed  by 
Parliament  and  not  otherwise. 

"XXXI.  Provided  alwaics  and  be  it  enacted,  That  all  Amercia- 
ments, Fynes  and  Issues  against  the  said  Corporation  and  theire 
Successors  had  charged  or  estreated  in  or  upon  account  of  any 
suites  or  actions  to  be  prosecuted  or  brought  against  them  shall 
not  be  pardoned  acquitted  or  discharged  by  any  Letters  of 
Signet,  Privy  Scale  or  Create  Scale  of  theire  Majesties,  theire 
Heires  or  Successors  or  otherwise  howsoever  and  in  case  any  such 
Amerciaments  Fynes  or  Issues  shall  be  estreated  into  their 
Majesties  Exchequer  against  the  said  Corporation  upon  any 
Processe  for  non-appeareance  att  the  suite  of  any  person  or 
persons  that  then  it  shall  and  may  be  lawful!  to  and  for  the  Offi- 
cers of  their  Majesties  Exchequer  for  the  time  being  who  are 
hereby  directed  to  pay  the  said  ycarely  sume  of  One  hundred 
thousand  pounds  to  the  said  Corporation  to  detaine  soe  much 
money  as  the  said  Amerciaments,  Fynes  or  Issues  shall  amount 
unto  out  of  the  said  yearly  sume  of  One  hundred  thousand  pounds 
payable  to  the  said  Corporation. 

"XXXII.  And  he  it  further  enacted,  That  if  att  any  time 
hereafter  any  person  or  persons  shall  obtaine  any  Judgment  or 
Judgments  in  any  Court  of  Lawe  against  the  said  Corporation  for 
any  Debte  or  sume  of  money  and  shall  bring  execution  or  execu- 
tions thereupon  unto  the  said  Officers  of  theire  Majesties  Exche- 
quer, that  then  it  shall  and  may  be  lawful  to  and  for  the  said  Of- 
ficers of  the  said  Exchequer,  to  pay  and  they  are  hereby  required 
to  pay  the  said  sume  or  sumes  of  money  in  the  said  executions 
mentioned  to  the  Plaintiffe  or  Plainetiffes  therein  named  or  theire 
Assignes  whose  Receipte  shall  be  a  suflicient  discharge  for  the 


378 


The     English     Banking     System 

same  and  that  the  said  Officers  of  the  Exchequer  shall  and  may 
detain  soe  much  of  the  said  yearely  sume  of  One  hundred  thou- 
sand pounds  as  the  said  Debt  or  Debts  shall  amount  unto. 

"XXXIII.  .  .  .  and  whereas  some  Doubts  may  arise 
whether  any  Member  or  Members  of  Parliament  may  be  con- 
cerned in  the  Corporation  to  be  erected  in  pursuance  of  this  Act 
be  it  therefore  declared  and  enacted  by  the  authority  aforesaid, 
that  it  shall  and  may  be  lawfuU  to  and  for  any  Member  or  Mem- 
bers of  the  House  of  Commons  to  be  a  Member  or  Members  of 
the  said  Corporation  for  the  purposes  in  this  Act  mentioned  any- 
thing in  the  recited  Act  conteined  to  the  contrary  in  any  wise 
notwithstanding. ' ' 

(2)    THE   LATER   ACTS. 

Among  the  statutory  enactments  subsequent  to  5  and  6 
Will,  and  Mary,  c.  20,  it  is  only  necessary  to  call  attention  to 
those  which  limited,  improved,  or  in  any  way  altered,  the  legal 
position  of  the  Bank.  Loan  acts  pure  and  simple  and  the 
merely  formal  acts  which  prolonged  the  Bank  charter,  and 
which  were  moreover  generally  combined  with  arrangements 
for  loans,  need  not  be  referred  to  here.  Among  the  former 
we  need  only  notice  those  provisions  which  relate  to  the  exclu- 
sive privileges  of  the  Bank.  Thus  it  is  stated  in  8  and  9  Will. 
III.c.  20,  s.  XXIX,  1697: 

"And  he  it  further  enacted,  That  during  the  continuance  of  the 
Corporation  of  the  governor  &  company  of  the  bank  of  England 
no  other  Bank  or  any  other  corporation,  society,  fellowship, 
company  or  constitution,  in  the  nature  of  a  bank  shall  be  erected 
or  established,  permitted,  suffered,  countenanced,  or  allowed  by 
act  of  parliament  within  this  kingdom." 

This  provision  was  further  extended  in  7  Anne,  c.  7  (1708). 

"That  during  the  continuance  of  the  said  corporation  of  the 
governor  and  company  of  the  bank  of  England,  it  shall  not  be 
lawfull  for  any  body  pohtic  or  corporate  whatsoever,  erected  or 
to  be  erected  (other  than  the  said  governor  and  company  of  the 
bank  of  England)  or  for  any  other  persons  whatsoever  united 
or  to  be  united  in  covenants  or  partnership,  exceeding  the  num- 
ber of  six  persons,  in  that  part  of  Great  Britain  called  England  to 
borrow,  owe  or  take  up  any  sum  or  sums  of  money  on  their  bills 

279 


National     Monetary     Commission 

or  notes  payable  at  demand,  or  at  any  less  time  than  six  months 
from  the  borrowing  thereof." 

And  was  again  expressly  repeated  in  15  Geo.  II,  c.  13,  s.  5.  1742: 
"And  to  prevent  any  doubts,  that  may  arise  concerning  the 
privilege  or  power  given  by  former  acts  of  Parliament  to  the  said 
governor  and  company  of  exclusive  banking,  and  also  in  regard 
to  the  erecting  of  any  other  bank  or  banks  by  parliament  or  re- 
straining other  persons  from  banking,  during  the  continuance  of 
the  said  privilege  granted  to  the  governor  and  company  of  the 
bank  of  England  as  before  recited ;  it  is  hereby  further  enacted 
and  declared  by  the  authority  aforesaid,  That  it  is  the  true 
intent  and  meaning  of  this  act,  that  no  other  bank  shall  be 
erected,  established  or  allowed  by  Parliament  and  that  it  shall 
not  be  lawful  for  any  body  politik  or  corporate  whatsoever, 
erected  or  to  be  erected,  or  for  any  other  persons  whatsoever, 
united  or  to  be  united  in  covenants  or  partnership,  exceeding  the 
number  of  six  persons,  in  that  part  of  Great  Britain  called 
England,  to  borrow,  owe  or  take  up  any  sum  or  sums  of  money 
on  their  bills  or  notes  payable  at  demand,  or  at  any  less  time 
than  six  months  from  the  borrowing  thereof,  during  the  contin- 
uance of  such  said  privilege  to  the  said  governor  and  company, 
who  are  hereby  declared  to  be  and  remain  a  corporation  with  the 
privilege  of  exclusive  banking  as  before  recited.  ..." 


980 


Appendix  II. 

THE  SETTLEMENT  OF  THE  NATIONAL  LAND  BANK. 

The  settlement  of  the  National  Land  Bank  was  drawn  up  on 
August  lo,  1695,  by  the  "trustees  and  managers"  of  the  bank, 
elected  by  the  subscribers  of  the  land  bank  loan.  The  draft 
was  m^ade  by  two  of  them,  Nicholas  Barbon  and  John  Asgill, 
and,  by  way  of  acknowledgment,  £2,000  in  bank  stock  was 
voted  to  the  former  and  £3,000  to  the  latter.  The  statute  is 
printed  in  Tord  Somers's  "Tracts,"  Vol.  XI,  as  "The  Settle- 
ment of  the  Land  Bank,"  and  its  principal  contents  are  as 
follows : 

It  was  proposed  to  raise  the  credit  of  owners  of  land  "by 
conveying  the  legal  estates  thereof  unto  trustees,  and  preserving 
and  continuing  the  same  in  them;  and  dividing  the  values 
thereof  into  greater  or  lesser  sums  and  making  such  values 
assignable  and  reassignable  in  register  books  *  *  *  and 
giving  power  unto  such  trustees  to  issue  out  bills  of  charge  on 
security  of  the  said  values." 

The  value  of  the  lands  conveyed  to  the  trustees  was  to  be 
divided  into  four  parts.  Three  of  these  were  called  "The 
values  of  the  register"  and  the  fourth  part  "The  equities  of 
redemption."  The  values  of  the  register  were  to  be  divided 
into  sums  of  thousands,  hundreds,  fifties,  etc.,  and  each  £100 
of  this  value  of  the  register  was  to  be  "esteemed  and  taken  as  a 
security  for  one  hundred  pounds  principal  money,  and  interest 
secured  on  the  lands  to  which  such  values  shall  relate  by  books 
and  numbers." 

"When  such  conveyance  shall  be  executed  the  auditor,  for 
the  time  being  (by  warrant  of  the  trustees  and  manager  for  the 
time  being,  in  writing,  and  not  otherwise),  shall  adjust  the 
whole  value  of  the  lands  so  conveyed  at  such  values  thereof  as 
shall  be  expressed  in  the  said  warrant,  and  shall  sign  such  valu- 
ation in  the  margin  of  the  said  conveyance,  and  of  the  counter- 

281 


National     Monetary     Commission 

parfc  thereof  *  *  *  which  valuation  shall  be  called  'the 
value  of  the  auditor.' "  The  register  was  then  to  reduce  this 
valuation  to  three-quarters.  This  reduced  value  was  to  be 
called  "  the  value  of  the  register,"  and  was  intended  as  "a  limita- 
tion to  the  trustees  and  managers  for  the  time  being,  to  restrain 
them  from  lending  monies,  or  issuing  out  bills  of  exchange  on 
security  of  the  said  lands  for  any  greater  sum  of  money  than 
such  reduced  values  of  the  register" — i.  e.,  than  three  quarters 
of  the  estimated  value  of  the  property. 

The  names  of  the  owners  of  the  properties,  together  with  a 
statement  of  the  value  of  the  auditor,  were  then  to  be  entered 
in  a  book  in  alphabetical  order.  The  credit  allowed  by  the 
Bank  was  then  to  be  entered  in  a  separate  book  called  "the 
value  ledger,"  in  which  a  debit  and  credit  account  was  to  be 
opened  for  each  owner  and  on  the  credit  side  an  entry  was  to 

be  made  in  the  following  form:  "Cr.  A.  B.  for pounds 

value  of  the  register,  secured  on  the  lands  rents  and  estates 
entered  in  libro  A.  No.  — ." 

The  values  of  the  register  only  amounted  to  three-quarters  of 
the  value  of  the  auditor,  and  the  remaining  quarter  formed  the 
equity  of  redemption,  so  that  the  owner  was  credited  with  the 
latter  in  another  book,  the  "purchase  ledger,"  in  the  following 
form:  "A.  B.  creditor  for  the  equity  of  redemption  of  the 
lands  rents  and  estates  entered  in  libro  A.  Xo.  — ." 
Besides  this  there  was  yet  another  book,  the  "voucher  book," 
for  "transferring  the  credit  of  the  said  values  and  the  right  and 
title  thereof."  This  formed  an  annex  to  the  value  ledger,  and 
served  especially  for  the  registration  of  the  documents  by 
reason  of  which  the  value  of  the  register  with  which  the  land- 
owner was  credited  was  gradually  transferred  into  the  hands  of 
the  Bank.  Thus  whenever  a  landowner  took  advantage  of  his 
credit  to  borrow  a  sum  of  money  from  the  bank,  he  had  to  sign 
a  warrant  from  the  trustees  to  the  register  authorizing  the 
latter  to  transfer  to  the  Bank  a  portion  of  the  value  of  the  register 
equal  to  the  sum  borrowed.  On  repayment  of  the  loan  an 
equivalent  amount  was  to  be  transferred  back  again. 

The  trustees  and  managers  for  their  part  had  the  right  to 
borrow  money  on  the  security  of  the  values  of  the  register,  but 
to  amounts  not  exceeding  the  value  of  the  advances  made  by 

28a 


The     English     Banking     System 

them.  This  borrowing  was  to  be  managed  by  the  issue  of 
bills  in  the  following  form : 

' '  This  bill,  pursuant  to  the  settlement  of  the  Land  Bank  enrolled 
in  Chancery  anno  dorn.  1695,  doth  charge  one  hundred  pounds 
value  of  the  register  secured  upon  the  lands  rents  or  estates 
entered  in  Hbro  No.  —  and  the  stock  of  monies  and  funds  of 
insurance  annexed  to  the  said  Bank  with  payment  of  one 
hundred  pounds  and  interest  to  A.  B.  By  order  of  the 
trustees  and  managers  of  the  Land  Bank,  established  Anno 
Dom.  1695." 

The  bills  were  to  be  secured  upon  a  definite  estate  only  by 
book  and  number;  but  this  reference  was  to  be  as  effective  as 
if  the  lands  referred  to  were  expressly  named  and  described  in 
the  bill. 

The  equities  of  redemption  were  at  the  free  disposal  of  the 
owner  even  should  the  values  of  the  register  be  completely 
charged,  but  they  were  liable  in  the  first  instance  for  the  credit 
which  the  owners  might  have  received  on  these  values  of  the 
register. 

The  trustees  and  managers  could  recall  the  loans  at  a  year's 
notice.  They  must  accept  repayments  at  any  time  but  for 
amounts  not  less  than  £100.  The  bills  issued  bore  interest,  the 
first  payment  of  which  fell  due  six  months  after  issue.  If  pav- 
ment  was  not  demanded  within  thirty  days  after  it  was  due,  the 
bills  ceased  to  bear  interest  until  the  day  on  which  they  were 
again  presented.  Should  a  property  lose  in  value,  the  bills  secured 
on  it  were  to  be  redeemed.  For  this  purpose  the  trustees  and 
managers  were  to  issue  monthly  announcements  in  which  all 
pay  offices  were  ordered  to  retain  and  pay  off"  the  bills  (as 
described  in  detail).  In  this  way  also  outstanding  interest  and 
capital  were  to  be  claimed.  So  long  as  the  interest  was  paid 
regularly  no  debtor  might  be  disturbed  in  his  possession  of  the 
land.  It  was  especially  stated  that  each  estate  was  chargeable 
only  with  the  value  secured  on  itself. 

For  the  security  of  the  bills  issued  the  trustees  and  managers 
were  to  "lay  out  and  employ  ten  shillings  per  annum,  out  of  the 
interest  of  every  one  hundred  pounds  by  them  lent  *  *  * 
to  be  a  fund  of  insurance."     This  fund  was  in  particular  to  be 


283 


National    Monetary     Commission 

charged  with  such  bills  as,  having  been  for  any  cause  whatever 
called  in,  had  yet  not  been  presented  for  payment.  The  notices 
calling  in  bills  were  to  be  published  monthly  for  six  months. 
Should  the  bill  not  be  presented  within  six  months  after  the  last 
notice,  the  lands  on  which  the  bill  was  charged  were  to  be  freed 
and  the  bills  were  thenceforth  to  be  charged  on  the  funds  of 
insurance.  If  the  debtors  of  the  Bank  failed  to  pay  interest  or 
capital  when  due  the  trustees  and  managers  might  use  the  ordi- 
nary legal  means  to  recover  the  debt. 

The  administration  of  the  loans  was  organized  as  follows: 

The  trustees  and  managers,  2 1  in  number,  were  to  be  selected 
each  year  on  November  2 1 .  The  election  was  to  be  by  a  major- 
ity of  votes  and  each  person  who  had  £1,000  or  more  in  the 
stock  was  to  have  5  votes  and  no  more;  £500  to  £1,000 
entitled  the  holder  to  3  votes,  £300  to  £500  to  2  votes,  and  £100 
to  £300  to  I  vote. 

Anyone  might  be  elected  who  had  at  least  £1,000  in  the 
stock.  If  the  share  of  one  of  those  elected  siiould  fall  below 
£1,000  his  office  ceased  ipso  facto.  Not  more  than  15  out  of  the 
trustees  for  the  previous  year  might  be  re-elected. 

The  trustees  were  to  make  decisions  by  a  majority  of  votes. 
They  might,  however,  elect  a  committee  to  manage  the  current 
administration.  The  appointment  of  all  the  officers  of  the 
Bank  was  in  their  hands.  Xo  one  might  be  auditor  or  register 
who  did  not  hold  at  least  £1,000  in  stock.  The  income  of  the 
trustees  and  the  yearly  dividend  were  to  be  settled  by  the 
general  assembly  of  the  shareholders. 


284 


Appendix  III. 

THE  PRESENT  FORMS  OF  THE  EXCHEQUER  BILLS,  TREASURY 
BILLS,  AND  EXCHEQUER  BONDS." 

Exchequer  hill. 

[Stamp]:  By  virtue  of  an  [Stamp]:  By  virtue  of  an 
act  29  Vict.  c.  25  I  £1,000.  act  29  Vict.  c.  25  i 
Dated  the  —  day  of Dated  the  —  day  of 

This  Exchequer  Bill  entitles^ or  Order  to  claim  payment 

of  One  Thousand  pounds  at  the  Bank  of  England  out  of  the  Con- 
solidated Fund,  at  the  expiration  of  any  period  of  Twelve  months, 
not  later  than  five  years  from  the  date  hereof. 

Interest  on  this  Bill  will  be  paid  half-yearly  at  the  Bank  of 
England,  at  such  rate  per  centum  per  annum  as  shall  be  notified 
from  time  to  time  in  the  "  London  Gazette  "  by  the  Commissioners 
of  Her  Majesty's  Treasury. 

This  Bill  may  be  paid  for  the  sum  of  One  Thousand  pounds, 
and  interest  accrued  thereon,  to  the  Receivers  and  Collectors  in 
the  United  Kingdom,  of  any  of  the  Public  Revenues,  Aids,  Taxes, 
or  Supplies,  or  to  the  account  of  Her  Majesty's  Exchequer  at  the 
Bank  of  England,  at  any  time  in  the  last  six  months  of  every 
year,  commencing  from  the  day  of  the  date  hereof,  in  which  it 
shall  have  currency  by  law. 

Signed  in  the  presence  of — 


Exchequer  hill  interest  certificate. 
No.  I.  £1,000.  10. 

[Act  29  Vict.  cap.  25.] 

This  Coupon  entitles  the  Bearer  to  Interest  on  the  above  sum 
for  half  year  to 


Comptroller  and  Auditor  General. 


«  According  to  the   treasury  minutes  of  March  9  (exchequer  hills  and 
bonds)  and  of  March  16,  1867  (treasury  bills). 

&  If  the  Blank  is  not  filled  up,  this  Bill  will  be  paid  to  bearer. 


285 


National    Monetary     Commission 

(On  the  back  of  the  bill.] 

The  holder  of  this  bill,  when  intending  to  claim  payment  of 
the  principal  money  at  the  expiration  of  any  year,  must  give 
three  days'  previous  notice  and  deposit  the  Bill  (together  with 
the  Interest  Coupons  not  due)  at  the  Bank  of  England  for 
verification. 


(Exchequer  bond.) 
£100. 

[Stamp]:  A  i.ooo.     Principal  to  l>e  paid  of  at  par 18 — .     Per  act — 

\'ict.  Reg.  cap. —     Interest  at  the  rate  of  —  per  cent  per  ann.     Dated 
at  the on  the 18 — . 

Exchequer  bond. 

This  Bond  entitles  the  Bearer  to  One  Hundred  Pounds,  with 
the  Interest  due  and  payable  thereon  half-yearly,  and  the 
Principal  Sum  secured  by  this  Bond,  to  be  repaid  out  of  such 
Moneys  as  shall  be  provided  by  Parliament  in  that  behalf. 

The  several  Sums  in  respect  of  Interest  mentioned  in  the 
annexed  Certificates  are  transferable  by  delivery  of  such  respec- 
tive Certificates,  and  will  be  payable  to  the  p>ersons  producing 
and  delivering  the  same  at  the  Bank  of  England. 

{To  be  signed  by  the  Comptroller  and  Auditor  General.) 

[EXCHEQUER  SEAL.] 

Signed  in  the  presence  of — 


N.  B.     The  Cheques  must  not  be  cut  off. 


Interest  certificate. 

No.  1 ,000  A.  £ 

Interest  certificate  on  exchequer  bond  per  act  —  Vict.  cap.  —  for  £100. 
This  Certificate  entitles  the  Bearer  to pound 


shillings,  Interest  at  £ —  per  cent  per  ann.,  payable  at  the  Bank 
of  England,  for  half  a  year  ending 18 — . 


Comptroller  and  .Auditor  General. 
a86 


The     English     Banking     Syste 


m 


Treasury  hill. 

A.  0000. 1.  Due  June  28,  iS'jj.  A.  0000. i 

£ By  virtue  of  an  Act  40  Vict.  c.  2.  £ 

London,  March  28,  1877. 

This  Treasury   Bill   entitles  " or  order  to  payment 

of pounds  at  the  Bank  of  England  out  of  the  Consolidated 

Fund  on  the  28th  June,  1877. 

(Signed) 

Comptroller  and  Auditor  General. 
In  presence  of — 


0  If  this  blank  be  not  filled  up,  the  Bill  will  be  paid  to  bearer. 


287 


Appendix  IV. 

AVERAGE    AMOUNT   OF   THE    PUBLIC    DEPOSITS    AT   THE    BANK   OF 

ENGLAND. 

The  report  of  the  committee  on  renewing  the  bank  charter, 
1831,  gives  the  average  amounts  of  the  pubUc  deposits  at  the 
Bank  of  England  for  the  years  1807  to  1 831,  as  follows: 

[000  omitted.] 


1807 

1808 

1809 

1810 

1811 

1813 

1813 

1814 

181S 

1816 

1817  .  . 

1818 

1819 

Total 


Amount. 


£13.647 

II. 761 

11. 093 

II.9SO 

10. 191 

10,390 

10.393 

13.158 

11.737 

10,807 

8.699 

7.066 

4.538 


133.430 


Year. 


i8ao 

1831 

lSl3 

i8j3 

1834 

1835 

1836 

1837 

i8j8 

l8»9 

1830 

i8ji 

■r..toi 


Amount. 


£3.713 
3.9JO 
4.  I07 
5.536 
7.  333 
5.347 
4.  314 
4.  3J3 
3.831 
3.86J 
4.761 
3.948 


54.664 


Average  from  1807  to  1831,  £7.533. 

The  following  table  refers  to  the  last  nineteen  years.  The 
estimates  for  the  years  1869  to  1879  are  taken  from  the  Econo- 
mist, December  13,  1879,  No.  1894.  The  averages  for  the 
remaining  years  are  based  on  the  weekly  returns  of  the  Bank 
for  that  period,  which  returns  are  given  in  the  corresponding 
numbers  of  the  Ecotwmist : 


288 


The     English     Banking     System 


[ooo  omitted.] 


Year. 


Year. 


Amount. 


1864 

1865 

1866 

1867 

1868 

1869 

1870 

1871 

1872 

Total 


£6.789 
6,556 
5.  290 
6.423 
4.856 
5.  129 
7.635  I 
7.071  I 
8.875    1 


58.624 


1873 

1874 

1875 

i87f 

1877 

1878 

1879 

1880 

1881 

1882 

Total 


£9.433 
6,  »SI 
S.223 
6.793 
5.838 
S.s6o 
5.  867 
6.851 
6.S35 
5.479 


63.8x9 


Average  from  1864  to  1882.  £0,444. 


Since  1882  the  development  has  been  as  follows; 


[000  omitted.] 


885. 
886. 
887. 


890. 
891  . 
892. 
893- 
894. 
895- 
896. 


Total,  1 883-1  f 


£6. 924 
7,288 
6.  196 
4.983 
5.377 

6.  443 

7.  179 
S.840 
6.  610 
5,856 
5.697 

6.  969 

7.  601 
10. 418 


93, 381 


1899. 

1900  . 

1901  . 

1902  . 
1903 

J  904  ■ 

1905  • 

1906  . 

1907  . 

1908  . 
1909 
1910  . 


Total,  1897-1900. 


£9,982 

10,  501 

10,  042 

9.  285 

9.73S 

11,069 

8,834 

8.454 

11.837 

10.387 

9.  189 

9.  22s 

10.519 

13.078 


142,  134 


Average  from  1883  to  1910  £8.412. 


299-11- 


289 


Appendix  V. 

BANK   ACT,    1892. 

[55  &  66  ViCT.    Ch.  48.J 

CONTENTS. 

Sec.  I.  Remuneration  to  Bank  of  England  for  management  of  unre- 
deemed debt  inscribed  in  books. 

Sec.  2.  Remuneration,  to  Bank  of  Ireland  for  management  of  unre- 
deemed debt  inscribed  in  books. 

Sec.  3.  Remuneration  to  Bank  of  England  for  management  of  Exchequer 
bonds  and  bills  and  Treasury  bills. 

vSec.  4.  General  provision  as  to  payments  for  management  of  unre- 
deemed debt  and  of  Exchequer  bonds  and  Inlls  and  Treasury  bills. 

Sec.  5.  Rate  of  interest  on  Government  debt  to  the  Banks  of  England 
and  Ireland. 

Sec.  6.  Mode  of  dealing  with  dead  Bank  of  England  notes. 

Sec.  7.  Internal  regulations  and  stock  of  Bank  of  England. 

Sec.  8.  Short  title,  commencement,  and  repeal. 

Schedule  of  .\cts  repealed  fpresenting  a  convenient  index  to  the  Acts 
regulating  the  relations  of  the  Bank  to  the  State). 


CHAPTER  48. — .\n  Act  For  making  furtlicr  Provision  respecting  certain 
Payments  to  the  Banks  of  P'ngland  and  Ireland,  and  for  other  purposes 
connected  with  those  Banks.     [^7th  June  189J.] 

BE  it  enacted   by   the  Queen's  most   Excellent   Majesty,   by 
and  with  the  advice  and  consent  of  the  Lords  Spiritual  and 
Temporal,  and  Commons,  in  this  present  Parliament  assembled, 
and  by  the  authority  of  the  same,  as  follows: 

I.  There  shall  be  paid  to  the  Bank  of  England,  during  the 
period  in  this  Act  mentioned,  as  remimeration  for  the  manage- 
ment of  the  National  Debt  inscribed  in  tlicir  books  an  annual 
sum  calculated  at  the  rate  of  three  hundred  and  twenty-five 
pounds  for  every  million  pounds  of  such  debt  up  to  five  hundred 
million  pounds,  and  at  the  rate  of  one  hundred  pounds  for  every 
million  pounds  of  such  debt  above  the  said  five  hundred  million 
pounds:  Provided  that  during  the  said  period  the  said  annual 


290 


The     English     Banking     System 

sum  shall  not  be  less  than  one  hundred  and  sixty  thousand 
pounds. 

2.  There  shall  be  paid  to  the  Bank  of  Ireland,  during  the 
period  in  this  Act  mentioned,  as  remuneration  for  the  manage- 
ment of  the  National  Debt  inscribed  in  their  books  an  annual 
sum  calculated  at  the  rate  of  four  hundred  and  twenty-five 
pounds  for  every  million  pounds,  if  such  debt  does  not  exceed 
thirty  million  pounds,  and  if  it  does  exceed  that  sum,  then  at  the 
rate  of  three  hundred  pounds  for  every  million  pounds  of  such 
debt:  Provided  that  during  the  said  period  the  said  annual  sum 
shall  not  be  less  than  eight  thousand  pounds. 

3.  There  shall  be  paid  to  the  Bank  of  England,  during  the 
period  in  this  Act  mentioned,  for  the  management  in  every 
financial  year,  of  Exchequer  bonds.  Exchequer  bills,  and  Treas- 
ury bills,  an  annual  sum  calculated  at  the  rate,  as  respects 
Exchequer  bonds  and  Exchequer  bills,  of  one  hundred  pounds, 
and,  as  respects  Treasury  bills,  of  two  hundred  pounds,  for 
every  million  pounds  of  bonds  or  bills  outstanding  on  the  last 
day  of  the  previous  financial  year. 

4. — (i.)  The  annual  sums  fixed  by  this  Act  for  the  manage- 
ment of  the  National  Debt  inscribed  in  the  books  of  the  Bank 
of  England  or  Ireland  and  of  Exchequer  bonds.  Exchequer  bills, 
and  Treasury  bills  shall  be  payable  in  respect  of  that  manage- 
ment for  every  financial  year  up  to  and  including  the  year  ending 
the  thirty-first  day  of  March,  one  thousand  nine  hundred  and 
twelve,  and  thereafter  from  year  to  year  until  Parliament  other- 
wise directs. 

(2.)  The  annual  sums  for  the  said  management  in  any  financial 
year  shall  be  paid  before  the  fifth  day  of  July  in  the  following 
financial  year. 

(3.)  The  National  Debt  Commissioners  shall  certify  the  amount 
of  the  unredeemed  National  Debt  which  on  the  last  day  of  every 
financial  year  is  inscribed  in  the  books  of  the  Bank  of  England 
and  Bank  of  Ireland,  respectively,  and  the  annual  sums  or  the 
management  of  the  Debt  in  the  following  financial  year  shall  be 
calculated  on  the  amount  so  certified. 

(4.)  Such  certificate  shall  state  the  nominal  capital  amount  of 
all  the  unredeemed  National  Debt  so  inscribed,  and  shall  state  the 


National     Monetary     Commission 

capital  amount  of  every  terminable  annuity  at  fifteen  years  pur- 
chase thereof  if  originally  created  for  a  term  exceeding  fifty  years, 
and  at  ten  years  purchase  thereof  if  originally  created  for  a  term 
of  fifty  years  or  under. 

(5.)  The  said  annual  sums  shall  continue  to  be  payable  out  of 
the  permanent  annual  charge  for  the  National  Debt. 

(6.)  For  the  purpose  of  calculating  the  said  annual  sums,  the 
National  Debt  shall  include  the  Local  Loans  stock  and  Guaran- 
teed Land  stock,  but  such  proportion  of  those  sums  as  is  payable 
in  respect  of  the  management  of  the  two  last-mentioned  stocks 
shall  be  paid  to  the  Bank  in  the  case  of  the  Local  Loans  stock  out 
of  the  Local  Loans  fund,  and  in  the  case  of  Guaranteed  Land 
stock  out  of  money  provided  by  Parliament  for  the  service  of  the 
Irish  Land  Commission. 

5.  Whereas  the  Bank  of  England  and  the  Bank  of  Ireland 
respectively  have  consented  to  the  annuity  or  interest  on  the  debt 
to  them  from  the  public  being  reduced  to  the  rate  of  two  and 
three-quarters  per  cent  per  annum  until  the  fifth  day  of  April  one 
thousand  nine  hundred  and  three;  Be  it  therefore  enacted  as 
follows : 

(i.)  The  annuity  or  interest  payable  as  part  of  the  permanent 
annual  charge  for  the  National  Debt — 

{a)  in  respect  of  the  debt  due  from  the  public  to  the  Bank  of 
England,  (which  at  the  passing  of  this  Act  amounts  to  eleven 
million  fifteen  thousand  and  one  hundred  pounds) ;  and 

{h)  in  respect  of  the  debt  due  from  the  public  to  the  Bank  of 
Ireland,  (which  at  the  passing  of  this  Act  amounts  to  two  million 
six  hundred  and  thirty  thousand  seven  hundred  and  sixty-nine 
pounds  four  shillings  and  eightpence),  shall  be  at  the  rate  of 
two  pounds  fifteen  siiillings  per  cent  per  annum,  until  the  fifth 
day  of  April,  one  thousand  nine  hundred  and  three,  and  after 
that  day,  at  the  rate  of  two  pounds  ten  shillings  per  cent  per 
annum:  Provided  that  if  the  Bank  concerned  by  notice  in 
writing  to  tiic  Treasury  six  months  before  the  said  day  decline 
to  accept  such  lower  rate  of  interest,  the  debt  to  that  Bank  may 
be  paid  off  without  further  notice,  and  until  payment,  the  said 
annuity  or  interest  shall  continue  to  be  payable  at  the  rate  of 
two  pounds  fifteen  shillings  per  cent  per  annum. 


2Q? 


The     English     Banking     S  y  s  t  e 


m 


(2.)  The  said  annuity  or  interest  shall  be  paid  by  equal  quar- 
terly payments  on  the  fifth  day  of  January,  the  fifth  day  of 
April,  the  fifth  day  of  July,  and  the  fifth  day  of  October  in  each 
year.    ' 

6. — (i.)  Where  Bank  of  England  notes  issued  more  than  forty 
years  have  not  been  presented  for  payment,  the  Bank  of  England 
may  write  off  the  amount,  or  any  proportion  of  the  amount  of 
the  said  notes  from  the  total  amount  of  notes  issued  from  the 
issue  department,  and  the  Bank  Charter  Act  1844  shall  apply 
as  if  the  amount  of  notes  so  written  off  had  not  been  issued; 
Provided  that — 

(a)  a  return  of  the  amount  of  notes  so  written  off  shall  be 
forthwith  sent  to  the  Treasury  and  laid  by  them  before  Parlia- 
ment; and 

(&)  this  section  shall  not  affect  the  liability  of  the  Bank  to 
pay  any  note  included  in  the  amount  so  written  off,  and  if  it  is 
presented  for  payment  the  amount  shall  either  be  paid  out  of 
the  bank  notes,  gold  coin,  or  bullion,  in  the  banking  department, 
or,  if  it  is  exchanged  for  gold  coin  or  bullion  in  the  issue  depart- 
ment, or  for  a  note  issued  from  the  issue  department,  a  corre- 
sponding amount  of  gold  coin  or  bullion  shall  be  transferred  from 
the  banking  department  and  appropriated  to  the  issue  depart- 
ment. 

(2.)  This  section  shall  be  construed  as  one  with  the  Bank 
Charter  Act,  1844. 

7. — (i .)  It  shall  be  lawful  for  Her  Majesty  the  Queen  to  grant, 
and  for  the  Bank  of  England  to  accept,  a  supplemental  charter 
regulating  the  internal  affairs  of  the  corporation  of  the  Bank 
of  England,  and  if  such  charter  is  granted  the  Acts  specified  in 
Part  III.  of  the  schedule  to  this  Act  shall  be  repealed  as  from 
the  date  of  such  supplemental  charter  to  the  extent  in  the  third 
column  of  that  schedule  mentioned. 

(2.)  Notwithstanding  the  repeal  of  any  enactment  by  this  Act 
the  capital  stock  of  the  Bank  of  England  as  existing  at  the 
passing  of  this  Act  shall  be  subject  to  the  enactments  so  far  as 
unrepealed  which  relate  to  stock  of  the  Bank  of  Itngland,  and 
the  holders  of  the  stock  shall  be  members  of  the  corporation  of 
the  Bank  of  England. 

8. — (i.)  This  Act  m_ay  be  cited  as  the  Bank  Act,  1892. 

293 


National     Monetary     Commission 


(2.)  This  Act  shall  take  effect  as  from  the  beginning  of  the 
current  financial  year. 

(3.)  The  Acts  set  out  in  Parts  I.  and  II.  of  the  schedule  to 
this  Act  are  hereby  repealed  to  the  extent  in  the  third  column 
of  that  schedule  mentioned. 


1 

1 


Schedule  of  Enactments  Repealed. 

Part  I. — Enactments  relating  to  the  debt  from  the  public  to  and 
the  stock  0}  the  Bayik  of  Englatid. 


Session  and  chapter. 


Title  or  short  title. 


S&  6  Will.  &  Mar.c.  20.    The  Bank  of  England  act.  1694.  .  . 
8  &  9  Will.,  3.  c.  20.  .    The  Bank  of  England  act,  1696.  . 


6  Anne,  c.  S9-  (c  3»- 
in  the  old  editions). 


7  Anne.  c.  30.  (c.  7.  in 
the  old  editions). 


An  act  for  regulating  the  qualifica- 
tions of  the  elections  of  the  gov- 
ernor, deputy  governor,  direc- 
tors, and  voters  of  the  Governor 
and  Company  of  the  Bank  of 
England. 

The  Hank  of  England  act,  i  708 . . . 


Extent  of  repeal. 


Section  2 1 ;  section  3  2 ;  and 
section  34. 

Section  26.  from  "or  for 
whom  such  subscrip»- 
tions  shall  be  made" 
down  to  "twentieth  day 
of  June  be  and,"  and 
from  "*at  all  times" 
down  to  "June;"  sec- 
tion 32,  down  to  "by 
virtue  of  the  said  recited 
act  and;"  and  the  words 
"from  and  after  the 
completing  the  said 
subscriptions;"  section 
33  down  to  "ninety- 
seven;"  section  37;  sec- 
tion 4  7 ;  section  48. 

The  whole  act. 


Preamble;  sections  1  to  s. 
section  67  down  to  "per- 
sons, and  that"  and 
from  "and  the  said 
allowances"  down  to 
"  Governor  and  com- 
pany." and  from  "al- 
lowances and"  down  to 
"  governor  andcompany 
as  aforesaid;"  section 
68. 


294 


The     English     Banking     Syst 


c  m 


Part  I. — Enactments  relating  to  the  debt  from  the  public  to  and 
the  stock  of  the  Bank  of  England — Continued. 


Session  and  chapter. 


Title  or  short  title. 


3  Geo.  I,  c.  8   . 
1 1  Geo.  I,  c.  9  . 


I  Geo.  2,  Stat.  2,  c. 


2  Geo.  2,  c.  3. 


IS  Geo.  2,  c.  13 


19  Geo.  2,  c.  6  . 


23  Geo.  2,  c.  I  , 


23  Geo.  2,  c.  22  . 


The  Bank  of  England  act,  1716,. . , 

An  act  the  title  of  which  begins 
with  the  words  "An  act  for  con- 
tinuing the  several  annuities," 
and  ends  with  the  words  "re- 
deemable by  Parliament." 

An  act  for  granting  an  aid  to  His 
Majesty  by  sale  of  annuities  to 
the  Bank  of  England  at  £4  per 
centum  redeemable  by  Parlia- 
ment, and  charged  upon  the 
duties  on  coals  and  culm. 

An  act  for  raising  the  sum  of 
£1,250,000  by  sale  of  annuities 
to  the  Bank  of  England  after 
the  rate  of  £4  per  centum  per 
annum,  redeemable  by  Parha- 
ment,  and  for  applying  the  pro- 
duce of  the  sinking  fund. 

An  act  for  establishing  an  agree- 
ment with  the  Governor  and 
Company  of  the  Bank  of  Eng- 
land for  advancing  the  sum  of 
£1,600,000  toward  the  supply 
for  the  service  of  the  year  1742. 

An  act  the  title  of  which  begins 
with  the  words  "An  act  for  es- 
tablishing an  agreement,"  and 
ends  with  the  words  "one 
thousand  seven  hundred  and 
forty-six." 

An  act  for  reducing  the  several  an- 
nuities which  now  carry  an  inter- 
est after  the  rate  of  £4  per  cen- 
tum per  annum  to  the  several 
rates  of  interest  therein  men- 
tioned. 

An  act  for  giving  further  time  to 
the  proprietors  of  annuities  after 
tlie  rate  of  £4  per  centum  per 
annum  to  subscribe  the  same  in 
the  manner  and  upon  the  terms 
therein  mentioned,  and  for  re- 
deeming such  of  the  said  annui- 
ties as  shall  not  be  so  sub- 
scribed. 


Extent  of  repeal. 

Section  45. 

Preamble  and   sections    i 
and  s. 


Section  5. 


Do. 


Sections  6  and  7. 


Section  3  ;  section  5  ;  sec- 
tion 8;  sections  13  and 


Tlie  whole  act,  except  sec- 
tion 8. 


The  whole  act,  except  sec- 
tions 8  and  i  4. 


29s 


National     Monetary     Commission 

Part  I. — Enactments  relating  to  the  debt  from  the  public  to  and 
the  stock  of  the  Bank  of  England — Continued. 


Session  and  chapter. 

Title  or  short  title. 

Extent  of  repeal. 

56  Geo.  3.  c. 

96 

An  act  for  establishing  an  agree- 
ment  with    the   Governor   and 
Company  of  the  Bank  of  Eng- 
land, for  advancing  the  sum  of 
£3,000.000  for  the  service  of  the 
year  1816. 

Section  3 ,  down  to  ' '  ser\-- 
ice  as  aforesaid,"  and 
from  "making  an  en- 
crease'"  to  the  end  of  the 
section;  and  section  5. 

24  &  25  Vict. 

.  c. 

3 

An  act  to  make  further  provision 
respecting  certain  payments  to 
and  from  the  Bank  of  England, 
and  to  increase  the  facilities  for 
the  transfer  of  stocks  and  annui- 
ties, and  for  other  purposes. 

The  whole  act,  except  sec- 
tions 4.  5.  9.  and  10. 

29  &  30  Vict. 

.  c. 

25... 

The  exchecjuer  bills  and  bonds  act. 
1866. 

Section  29. 

ii  &  34  Vict. 

.  c. 

71 .  .  . 

The  national  debt  act,  1870 

Sections  40  and  64. 

40  &  41  Vict. 

.  c. 

2  .  .  .  . 

The  treasury  bills  act,  1877 

Section  1 1  and  section  i  2 
from  "The  allowance" 
to  the  end  of  the  section. 

50  &  SI  Vict. 

.  c. 

:6.  .  . 

National  debt  and  local  loans  act, 
1887. 

Section  18. 

$1  Sc  $2  Vict. 

c. 

2  .  .  .  . 

The    national    debt     (conversion) 
act.  1888. 

Section  31. 

S2  &  Si  Vict. 

c. 

4.  .  .  . 

The  national  debt  redemption  act, 
1889. 

Section  i  7. 

P.\RT  II. — Enactments  relating  to  the  debt  jrom  the  Public  to  the 
Bank  of  Ireland. 


28  &  29  Vict.,  c.  16.  . 


An  act  to  make  further  provision 
for  the  management  of  the  imre- 
deemed  public  debt  in  Ireland 
and  for  the  reduction  of  the  in- 
terest payable  on  certain  sums 
advanced  by  the  Bank  of  Ireland 
for  the  public  service. 


The  whole  act. 


296 


The     English     Banking     System 

Part  III. — Enactments  relating  to  internal  affairs  of  Bank  of 

England. 


Session  and  chapter. 


Title  or  short  title. 


E.xtent  of  repeal. 


8  &  9  Will.  3.  c.  20. 


IS  Geo.  2.  c.  13 


24  Geo.  2,  c.  4  . 


7  Geo.  3.  c.  4f 


35  &  36  Vict.,  c.  34. 


The  Bank  of  England  act.  1696.  . 


An  act  for  establishing  an  agree- 
ment with  the  Governor  and 
Company  of  the  Bank  of  Eng- 
land for  advancing  the  sum  of 
£1,600,000  toward  the  supply 
for  the  service  of  the  year  1742. 

An  act  for  enabling  the  Bank  of 
England  to  hold  general  courts 
and  courts  of  directors  in  the 
manner  therein  directed 

An  act  for  regulating  the  proceed- 
ings of  certain  public  companies 
and  corporations  carrying  on 
trade  or  dealings  with  joint 
stocks  in  respect  to  the  declaring 
of  dividends,  and  for  further 
regulating  the  qualification  of 
members  for  voting  in  their  re- 
spective general  courts. 

The  Bank  of  England  (election  of 
directors)  act,  1872. 


Section   34   from   "within 
seven  days"  to  the  end 
of   the   section;   section 
Si- 
Section  13. 


The  whole   act,   so  far  as 
unrepealed. 


The  whole  act,  so  far  as  it 
applies  to  the  Bank  of 

England. 


The  whole  act. 


297 


I 


ry> 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 

This  book  is  DUE  on  the  last  date  stamped  below. 

-  '    'M47' 

j/\^  4     1952 

0CT21» 

.Sc  «» 1 5 1*" 

RETURNED  TO  UCSB 

I.L.L.- 

JUL      3BiB7a  L^K* 

w 

^UL    51 

U^ 

L   OCT  0^.198/ 

r 

.)^V^ 

Form  L9-25m-8,*46 (9852)444 


3  1158  01212  8376 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 

Illlllllllllll   ■ 


AA    001  108  709    5 


m 

2994 
P53h 


